BBA Seeks Clarification on CASS RP from FSA

On 3 September 2012, the British Bankers’ Association (“BBA”) published a letter to the Client Assets Unit of the FSA seeking clarification with respect to several sections of the recently finalised CASS Resolution Pack rules contained within Chapter 10 of the FSA’s Client Assets Sourcebook, specifically:

  • CASS 10.3.1(11): Retail and Professional Agreements – whether a firm is permitted to include in its CASS RP only those agreements relating to clients where money or assets are actually held, or alternatively whether all agreements for all investment business clients should be included within the CASS RP;
  •  CASS 10.1.16R: FSA Notification – whether there is some concept of ‘materiality’ behind the requirement to notify the FSA immediately if a firm has not complied with, or is unable to comply with, the requirement to maintain and be able to retrieve a CASS Resolution Pack, or alternatively whether all breaches, no matter how small, must be notified to the FSA;
  • CASS 10.1.9E(2): Reliance on CASS Systems – under this rule, firms are obliged to put in place arrangements to ensure that systems upon which the firm is reliant for the performance of its CASS RP obligations remain operational and accessible after insolvency.  Noting the difficulty in securing the legal enforceability of this type of clause, the BBA asks for clarification as to whether a firm can instead rely on Section 14 of the Investment Bank Special Administration Regulations 2011 on Continuity of Supply, which obliges suppliers of key services to continue to supply those services to the administrator of a firm;
  • CASS 10.1.11R(2): Correction of Inaccuracies – this rule requires correction of inaccuracies within a CASS RP within 5 business days of the inaccuracy occurring.  The BBA seeks clarification as to whether the reference in the regulations to “material” implies that the FSA is only concerned with the correction of errors or mistakes, or alternatively whether it requires prompt updating of the entire CASS RP.  The BBA also seeks guidance on what is to be considered “material”, and an explanation of why 5 business days has been chosen as the applicable updating period instead of “…a more workable ‘monthly’ basis…”;
  • CASS 10.2.1R(3): Representatives and Agents – this rule requires the firm to identify each appointed representative, tied agent, field representative or other agent of the firm which receives client money or safe custody assets.  The BBA is seeking clarification of what is meant by “other agents”; and
  • CASS 10.2.1(6): CASS RP Affiliates and Third Parties – this rule requires a firm to identify group members and third parties “involved in operational functions relating to any obligations imposed on the firm under CASS 6 or CASS 7”.  The BBA is seeking clarification with respect to the meaning of the phrase “…operational functions…” together with examples of the types of third parties to which the regulation would apply.
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FSA Consults on CASS Resolution Packs for Insurance Intermediaries

On 28 August, the FSA published Consultation Paper CP12/10, “Review of the client money rules for insurance intermediaries”.

The Consultation Paper is aimed at all insurance intermediaries to which CASS 5 applies.  It attempts to address a number of concerns which arose during the FSA’s review of CASS 5, including:

  • inappropriate controls around the use of non-statutory trusts;
  • ineffective risk transfer documentation;
  • infrequent client money calculations; and
  • the segregation of client money.

As part of its Consultation Paper, the FSA proposes to introduce the “CASS 5 Resolution Pack”.  The FSA estimates that there are approximately 3,000 firms in the UK which operate with permission to hold client money.  These will be the firms most affected by the CASS 5 Resolution Pack proposals.  The proposal itself largely mirrors the CASS Resolution Pack requirements for firms which are subject to CASS 6 (custody rules) and/or CASS 7 (client money rules) as detailed in Policy Statement PS 12/6 published by the FSA in March 2012 (see blogpost “FSA Policy Statement on CASS Resolution Packs” dated 28 March 2012).  However, there are a few notable differences, such as the absence of:

  • an express right to exhibit documentation in the CASS RP of an affiliate[1];
  • an express right to exhibit documentation in electronic form[2];
  • a requirement to ensure that any systems for the provision of component documents within the CASS RP remain operational and accessible after the insolvency of the firm[3]; and
  • a requirement for the firm to provide information with respect to the affiliates and third parties on which it is dependent for the performance of its CASS obligations[4].

The purpose of the CASS 5 Resolution Pack is to assist an insolvency practitioner access information required to deal with client money in a timely manner.  It is proposed that insurance intermediaries must, at all times, be able to provide the documentation specified in the schedule below to an insolvency practitioner within 48 hours of the firm’s failure.

CASS 5 Resolution Packs must be reviewed on an ongoing basis to ensure that they remain accurate, and any material inaccuracies must be corrected within 5 business days of the inaccuracy occurring.  The firm must notify the FSA immediately if it is not able to comply with these requirements.

In practice, updating of a CASS 5 Resolution Pack is likely to represent less of a burden than is the case with respect to a ‘normal’ CASS Resolution Pack.  This is due to the fact that the documentation to be incorporated within the CASS 5 Resolution Pack is more static in nature.  Nonetheless, the FSA proposes to change the frequency with which client money calculations must be performed, from the current once every 25 business day period to:

  • where the firm holds client money under a non-statutory trust:
    • at least every 7 business days if the firm held more than GBP 250,000 of client money at any time during the calendar year prior to the year the calculation is made; or
    • at least every 14 business days if the firm held less than or equal to GBP 250,000 of client money at any time during the calendar year prior to the year the calculation is made; and
    • at least every 25 business days where the firm holds client money under a statutory trust.

As each firm to which the CASS 5 Resolution Pack rules apply is obliged to include the latest client money calculation and reconciliation within its pack, a degree of effort to maintain the CASS 5 Resolution Pack remains.

The Consultation Paper is open for comments until 30 November 2012.  The FSA expects to publish its feedback to the consultation, together with final rules, in the second quarter of 2013.  It seems likely that the rules themselves will not come into force until 12 months from the publication of the final rules for all provisions (except for separate proposals regarding unclaimed client money).

SCHEDULE

DOCUMENTS FORMING PART OF THE CASS 5 RESOLUTION PACK

  • a master document containing information sufficient to retrieve each document in the firm’s CASS resolution pack;
  • a document identifying all the institutions with which client money may be held, including approved banks, money market funds or other third parties to whom client money may be passed;
  • a document identifying each appointed representative, field representative or other agent of the firm which may receive client money in its capacity as the firm’s agent;
  • a document identifying each senior manager and director and any other individual and the nature of their responsibility within the firm who is critical or important to the performance of operational functions related to any of the obligations imposed on the firm under CASS 5;
  • for the institutions identified in (2) all trust letters;
  • the latest client money calculation;
  • the latest bank reconciliation;
  • a copy of the firm’s annual reconciliation down to individual client balances; and
  • any Non-Statutory Trust deeds.

[1] See CASS 10.1.6R

[2] See CASS 10.1.13G

[3] See CASS 10.1.9E(2)

[4] See CASS 10.2.1(6)

CASS Resolution Pack Requirements Unaffected by FSA CASS Consultation Paper

On 25 July 2012, the FSA published consultation paper CP 12/15 on “Client Assets Firm Classification, Oversight, Reporting and the Mandate Rules”.  CP 12/15 is open for comment until 30 September 2012, and consults on possible changes in the following areas:

  • CASS firm classification and operational oversight:
    • clarifying that firms which only arrange safeguarding and administration of assets do not fall within the scope of CASS 1A;
    • clarifying the date on which a firm becomes a CASS firm for the firm time or when it changes CASS categories;
    • proposing changes to the procedure whereby a CASS small firm can opt to be treated as a CASS medium firm and a CASS medium firm can opt to be treated as a CASS large firm;
    • Client money and assets return (“CMAR”):
      • proposing amendments to the CMAR template regarding holding of safe custody assets and client money balances; and
      • Clarifying the scope of the mandate rules in CASS 8, confirming that the rules do not apply to:
        • a firm in relation to client money held by that firm in accordance with CASS 5 or CASS 7, or client money assets held by that firm in accordance with CASS 6; or
        • an operator of a regulated collective investment scheme, in relation to activities carried on for the purpose, or in connection with, the operation of the scheme.

Fortunately, for those affected by CASS matters, the changes do not impact on the informational requirements forming part of the CASS Resolution Pack initiative, or the creation/maintenance of a CASS Resolution Pack more generally.  The deadline for submission of a first CASS Resolution Pack remains as 1 October 2012.

Webinar on CASS Resolution Packs Now Available to Watch Online

If you have an interest in Cass Resolution Packs and missed the Webinar which took place on 21 June with Derivsource, a video of the presentation is now online and available here.

The presentation provides a brief background to CASS RP and summarises the law in this area before explaining in detail the practicalities and challenges of creating a CASS Resolution Pack.  Template Cass Resolution Packs in MS Word and MS Excel are both shown, together with an online demonstration of a bespoke CASS RP database (for information on this, please see our CASS RP website).

CASS Resolution Packs: The 1 October 2012 Deadline Looms

Introduction

Any UK firm which is subject to CASS 6 (custody rules) and/or CASS 7 (client money rules) is obliged to have a CASS Resolution Pack in place by 1 October 2012.

CASS Resolution Packs form part of the FSA’s wider review of the client assets regime in the UK and represent the point where the client money rules meet resolution planning.  The rules require a firm to collate certain information regarding its handling of client money and safe custody assets that would be of use to an insolvency practitioner in the event of the firm’s failure.  The purpose of the rules is to facilitate the return of client money and safe custody assets to clients more quickly than is currently the case.

Creating a CASS Resolution Pack

In theory, a CASS Resolution Pack should be relatively straightforward to produce.  Broadly speaking, the exercise breaks down fairly neatly into four main areas:

  • analysis of the institutions with which client money or safe custody assets have been placed by the firm;
  • analysis of the documentation in place with the firm’s clients;
  • identification of the employees of the firm who are critical or important to the performance of the firm’s CASS obligations; and
  • third parties and systems on which the firm is reliant for performance of its CASS obligations.

Practical Issues to Bear in Mind

Although the theory behind CASS Resolution Packs is easy to understand, the reality of CASS Resolution Pack creation is sometimes rather different.  Some firms are currently unaware of the location of all of the documentation required as part of a CASS Resolution Pack – a necessary first step in preparing the pack itself.  In addition, the CASS Resolution Pack rules require firms to have arrangements in place to ensure that electronic systems which are important to CASS compliance remain operational and accessible following the firm’s failure.  As such, all such contracts will require review and it may be necessary to approach the vendors of any such systems with a view to renegotiation of contractual terms – a process which often proves protracted.

Questions also remain as to the form the CASS Resolution Pack should take.  PS12/6, the FSA’s Policy Statement on CASS Resolution Packs, is silent on this issue.  CASS Resolution Packs in both Word and Excel formats exist, and databases designed specifically for the task of creating a CASS Resolution Pack are being developed.  All formats have their pros and cons.  The key factors to consider in choosing the form of a CASS Resolution Pack are:

  • size of the firm – the larger the CASS operation of the firm the more robust the CASS Resolution Pack needs to be due to the sheer volume of documentation which must be assimilated into the pack itself and the requirement for collaborative input from multiple users in order to bring the pack together;
  • ease of maintenance – any change of circumstances which renders the content of a document forming part of the CASS Resolution Pack inaccurate must be corrected within 5 Business Days.  In reality, CASS Resolution Packs for Large CASS firms are likely to be in a constant state of updating and any solution chosen by such firms must be robust enough to accommodate this;
  • flexibility – it seems likely that the rules on CASS Resolution Packs will have to be amended in the future to accommodate any changes resulting from the FSA’s general review of the UK CASS regime.

Cass Resolution Packs in Word are relatively quick and cheap to create.  However, they are not well suited to collaborative working in terms of data input and suffer from issues associated with maintaining data integrity.  I wouldn’t recommend using Word for any but the smallest firms.  Excel is definitely a step forward as data can more readily be filtered and analysed.  Again, however, the problems associated with sharing of Excel workbooks is well known and data validation is difficult to maintain over time and between multiple users.  Bespoke databases do not suffer from these problems but clearly entail greater expense and a longer lead time to develop.  However, on balance, I believe that they are the most appropriate solution, at least for CASS Large firms.

The FSA has made clear in its 2012-13 Business Plan that the protection of client assets sits right at the top of its agenda and it will be increasing scrutiny of firms in this area, particularly those that are systemically important.  Following the MF Global fiasco, one can only assume that regulatory oversight in this area will increase yet further.  As such, there is clear value for firms in getting CASS Resolution Pack planning right.  With just over four months left until the rules come into force, there is still enough time to complete the process, but please don’t expect this to be something that can just be cobbled together at the last minute.

The FSA’s policy statement on CASS Resolution Packs can be downloaded via this link:

http://www.fsa.gov.uk/static/pubs/policy/ps12-06.pdf

 

FSA POLICY STATEMENT ON CASS RESOLUTION PACKS

Introduction

Following the collapse of Lehman Brother and MF Global, the safety and security of client assets is a stated priority for the FSA.  On 26 March 2012, in furtherance of this agenda and as an “initial step in a wider review of the client assets distribution regime”, the FSA published Policy Statement PS 12/6, which contains final rules requiring certain firms to create and maintain a CASS Resolution Pack.

What is a CASS Resolution Pack?

A CASS Resolution Pack is a collection of records and documentation relating to a firm’s holding of client money and safe custody assets.  The purpose of creating and maintaining a CASS Resolution Pack is to provide a readily available tool which will assist an Insolvency Practitioner in locating and returning client money and safe custody assets more quickly than is currently the case.

To Which Firms do the Rules Apply?

The requirement to create and maintain a CASS Resolution Pack will apply to all investment firms which are subject to CASS Chapter 6 (Custody rules) or Chapter 7 (Client money rules).  The FSA estimates there to be approximately 815 such firms in the UK.  Note, however, that the rules do not apply to a firm to which CASS 6 applies merely because is arranges the safeguarding or administration of assets, or to insurance intermediaries which are subject to CASS 5.

Deadlines

Firms which are subject to the CASS Resolution Pack rules have until 1 October 2012 to be fully compliant.  Each such firm must ensure that it has a CASS Resolution Pack in place from the time it begins to hold client assets and that the CASS Resolution Pack is maintained for the entire period during which it holds client assets.

CASS Resolution Pack Requirements

The CASS Resolution Pack rules are implemented by insertion of a new CASS Chapter 10 (CASS Resolution Pack) into the FSA Handbook.  In broad terms, the effects of the rules are as set out below.

Cass Resolution Pack Contents

The Cass Resolution Pack rules create new obligations with respect to existing documentation, such as client categorisations, and also require firms to generate and maintain wholly new types of documentation, such as the master ‘signposting’ document and lists of individuals with significant involvement in the CASS process.  The Schedule to this article provides detail on the documentary components of a Cass Resolution Pack.

The ‘48 Hour Rule’

The documentation forming part of, and referred to within, a CASS Resolution Pack must be capable of being retrieved within 48 hours of (a) the appointment of an insolvency practitioner or (b) the request of the FSA, irrespective of whether the firm in question is a going concern or has entered into insolvency/resolution.  It is worth noting that the 48 hour period continues to run whether the days in question are business days or non-business days.  Moreover, where documents are held by a member of the firm’s group, the firm must have adequate arrangements in place to ensure that documents are still delivered within the 48 hour timescale.  The FSA notes that the 48 hour period is for retrieval of the relevant documentation and should not be used as a period during which the firm starts to produce the constituent elements of the CASS Resolution Pack.

The ‘Immediately Retrievable’ Rule

Certain documentation must be capable of being retrieved immediately so as to assist an insolvency practitioner in identifying and freezing client assets.  The FSA believes that, in general, firms will already have these documents to hand and so believes that the incremental costs associated with this provision will be minimal.  A full list of the documentation to which this requirement applies is provided in the Schedule to this article.  Firms should note that the FSA may rely on the inability of a firm to provide ‘immediately retrievable’ documentation as tending to establish that the firm is in contravention of the general requirement that documents be retrievable within 48 hours. 

Inaccuracies and Corrections

Firms must ensure that material inaccuracies in the content of any new documentation required to be produced as a result of the CASS Resolution Pack rules must be corrected within 5 business days of the inaccuracy arising.

Impact on Outsourcing and IT Systems

Firms which are subject to the CASS Resolution Pack rules must ensure that any arrangements with other group entities, external service providers or third party providers of electronic systems which form part of the firm’s CASS processes must remain operational and/or accessible even following the failure of the firm.

Reporting

Within Consultation Paper CP 11/16 the FSA had proposed that firms submit an annual report to the FSA in relation to CASS RP compliance.  As a result of comments received during the consultation period, the FSA has decided to amend this requirements such that now the individual with responsibility for CASS operational oversight within a firm will be required to report at least annually to the firm’s governing body in respect of its CASS Resolution Pack and notify the FSA immediately if the firm is non-compliant.

Conclusion

PS 12/6 contemplates no kind of iterative process occurring between firms and the FSA in improving the standard of CASS Resolution Packs over time, nor does it contemplate any kind of grace period for compliance.  In contrast, the message from the FSA is clear: firms must be fully compliant with the rules regarding CASS Resolution Packs by 1 October at the latest.  Consequently, with only 6 months to go, firms need to start planning ahead in terms of creating new documentation, understanding where the existing documentary components of its CASS Resolution Pack reside, improving the robustness of intra-group documentation arrangements and understanding the impact of CASS Resolution Packs on resourcing needs.  However, for those which begin the process soon, the current deadline should remain achievable, even with respect to CASS Large firms.

Continuing compliance will remain an issue which firms should not underestimate.  The requirement that the contents of a CASS Resolution Pack must be reviewed on an ongoing basis to ensure continuing accuracy, the five business days updating requirement, the ’48 hour rule’ and ‘immediately retrievable rule’ imply a potentially significant ongoing compliance burden.  Moreover, the FSA has made clear in its 2012/13 Business Plan that the focus on client money and assets will increase in the short and medium term, as will the intensity of the FSA’s supervisory approach to CASS issues in general.  In light of this, firms would do well to regard their obligations with respect to CASS Resolution Packs as a ‘business as usual’ workstream from the outset and plan accordingly.

SCHEDULE

Schedule

 

The table below details the documentation requirements of a CASS Resolution Pack and identifies, with respect to each requirement, whether this is (a) new and specific with respect to the CASS Resolution Pack rules or is an existing requirement under the CASS rules, and (b) whether the document in question should be capable of being retrieved immediately or within 48 hours.

 

Description

Reference

New / Existing Requirement

Retrieval Deadline

 

Master document containing information sufficient to retrieve each document in the firm’s CASS Resolution Pack 

CASS 10.2.1R(1)

New

48 hours

A document identifying institutions appointed by the firm to hold client money or safe custody assets 

CASS 10.2.1R(2)

New

Immediately

A document identifying each appointed representative, tied agent, field representative or other agent of the firm which received client money or safe custody assets in its capacity as the firm’s agent 

CASS 10.2.1R(3)

New

48 hours

A document identifying each individual who is important to the performance of the firm’s CASS obligations (including the person with responsibility for CASS oversight) and the nature of their responsibility 

CASS 10.2.1R(4)

New

Immediately

Any written notification or trust acknowledgement letters which must be given or received when a firm opens a client bank account or a client transaction account with a third party 

CASS 10.2.1R(5)

New

Immediately

A copy of each agreement, side letter and/or amendment agreement with institutions with which the firm deposits client money or safe custody assets 

CASS 10.2.1R(5)

New

48 hours

A document identifying and providing certain other information with respect to each group member and/or third party (a “Third Party Outsourcer”) which is involved in the performance of operational aspects of the firm’s obligations under CASS 6 or CASS 7 

CASS 10.2.1R(6)

New

48 hours

A copy of each executed agreement, side letter and/or amendment  agreement with any Third Party Outsourcer 

CASS 10.2.1R(7)

New

48 hours

A document which describes how to (a) gain access to relevant information held by, and (b) effect a transfer of client money or safe custody assets held by, each Third Party Outsourcer 

CASS 10.2.1R(8)

New

48 hours

A copy of the firm’s manual in which are recorded its procedures for the management, recording and transfer of client money and safe custody assets 

CASS 10.2.1R(9)

New

48 hours

Records of the grounds upon which the firm satisfied itself of the appropriateness of its selection of each third party with which it deposits safe custody assets 

CASS 6.3.1R(4)

Existing

48 hours

 

In relation to clients the safe custody assets of which have been used for securities financing transactions, records of (a) the consent from each such client to use the assets in question, and (b) the number of assets used 

CASS 6.4.3R

Existing

48 hours

Records and accounts which enable the firm to distinguish safe custody assets of one client from those of another client or the firm’s own assets 

CASS 6.5.1R

Existing

48 hours

The most recent internal reconciliations relating to safe custody assets 

CASS 6.5.2R

Existing

Immediately

A copy of every executed client agreement that includes a firm’s right to use safe custody assets for its own account, including disclosure annexes from Prime Brokerage agreements 

CASS 6.5.2AR

Existing

48 hours

The most recent external reconciliations relating to safe custody assets 

CASS 6.5.6R

Existing

Immediately

Records of the grounds upon which a firm satisfied itself as to the appropriateness of its selection of a third party with which it has deposited client money 

CASS 7.4.10R

Existing

48 hours

Records and accounts which enable the firm to distinguish client money of one client from that of another client or the firm’s own money 

CASS 7.6.1R

Existing

48 hours

The most recent internal reconciliations relating to client money 

CASS 7.6.2R

Existing

Immediately

Records sufficient to explain the method of internal reconciliation of client money balances 

CASS 7.6.7R

Existing

48 hours

With respect to firms which do not use the ‘standard method of internal client money reconciliation’, written confirmation from the firm’s auditor that the firm has adequate systems and controls in place 

CASS 7.6.8R

Existing

48 hours

The most recent external reconciliations relating to client money 

CASS 7.6.9R

Existing

Immediately

Record of each client categorisation together with supporting documentation 

COBS 3.8.2R(2)(a)

Existing

48 hours

A copy of any agreement pursuant to which a client is categorised or re-categorised 

COBS 3.8.2R(2)(c)

Existing

48 hours

Copies of all client agreements with retail clients and professional clients 

COBS 8.1.4R

Existing

48 hours

 

FSA PUBLISHES POLICY STATEMENT ON CASS RESOLUTION PACKS

On 26 March 2012, the FSA published Policy Statement PS 12/6 on CASS Resolution Packs.  We now know that all firms holding client money or safe custody assets will have until 1 October 2012 to be fully compliant with the CASS RP rules.

A full review of the policy statement will be posted within the next couple of days, so please remember to log back in.

All the best

Michael