CASS in the Regulatory Spotlight

There are two main methods of ensuring that the CASS framework is operating to protect the assets of clients. The first is to perform robust testing of the CASS controls put in place by financial institutions (backed by the threat of fines and individual sanctions for non-compliance) and the second is to observe the sufficiency of the rules in a bankruptcy situation. Unfortunately, current conditions suggest that we will experience both methods. 

COVID-19 is likely to lead to ‘the sharpest recession on record’ (according to the Bank of England) and as a result there will be a spike in firms becoming insolvent. Since the last big down-turn, large financial institutions have improved capital buffers and liquidity reserves and are seen to be part of the solution as opposed to part of the problem. On balance, it seems less likely (though not impossible) that large banks will fail. The higher likelihood of failure sits with the smaller and medium size firms that were less impacted by the regulator’s recent drive to reduce systemic risk. 

This higher risk of failure will generate more CASS control testing (including regulatory inspections) in order to ensure that if a firm fails that its CASS arrangements are in the best possible shape (meaning that most if not all of the client’s money and assets can be returned to them). We expect that the FCA will invariably focus their inspections on those smaller and medium-sized firms and we understand that it is the FCA’s intention to increase the number of CASS relevant visits.

It is important to be well prepared for a visit from the FCA and relevant documentation and controls should be reviewed in advance. Self-reviews should include thinking through the potential impacts of the COVID-19 related lock down as well as considering the core principles CASS compliance. Some of the COVID-19 impacts and key compliance questions that firms might consider include:

Potential Impacts of COVID-19:

• For some firms trade volumes have increased, whilst staff availability to perform reconciliations and break clearance has decreased. In relation to reconciliations, CASS firms need to verify:
  • Reconciliations are being performed;
  • Statement credits are either allocated to clients or returned within 10 days;
  • Breaks are being cleared at a reasonable rate; and
  • Where applicable, ensure that physical vault counts are still occurring. 
• Staff under time-pressure may be tempted to delay or defer certain processes or controls, firms should confirm that key controls are operating at acceptable frequency. 
• Firms should confirm that cheque handling processes are being performed in accordance with the rules.
• Lastly, firms should check that changes to client contracts (clients often request changes to contracts in times of market stress) are stored and documented on a durable medium. 

Core CASS Compliance Questions (non-exhaustive):

• Are the CASS governance arrangements working optimally and effectively?
• Does the firm have the relevant CASS skills and experience, particularly if there has been staff turnover? 
• Have changes to the business changed the CASS risk profile of the firm? Are those changes reflected in the CASS controls and processes?
• Have trust letters been refreshed?
• What controls are in place to ensure custody arrangements do not have liens?
• Is the CASS resolution pack complete and up to date?

If you are uncertain as to how to address these questions or have other CASS questions, we’d be delighted to discuss how we could help you. Please contact [email protected] or [email protected].