CASS audit reports on nominee companies

01 August 2019

SUP 3.10.5 R (3) requires the CASS audit report to include an opinion on a nominee in whose name client custody assets are registered. However, working out whether the rule applies in particular circumstances, and what the report should say; is less than straightforward.

Application

Firstly, the rule only applies to audit reports on certain types of regulated investment firm. Additionally, the rule only applies if the nominee in whose name the custody assets are registered is a subsidiary of the regulated firm. Where a regulated firm uses a nominee company which is owned by an affiliate, rather than being a subsidiary of the regulated firm itself, the audit requirement drops away. This increases the risk of error in the scoping of the audit report, particularly where businesses have been combined over time; such that multiple nominees are used - all subsidiaries of different group entities.

Opinion

The required opinion is similar to, but not the same as, the audit opinion given on CASS 6 in the period. This is important when it comes to breaches. If the audit report identifies an exception against a particular CASS 6 rule, you might expect a similar exception in the nominee opinion, but:

  • only if the exception relates to assets held by the nominee; and
  • that nominee is a subsidiary; and
  • the rule in question relates to the ‘custody, identification and control of custody assets’.

This could be a significant exercise to conduct. I don’t know of any regulated firm that logs whether a particular breach relates to assets held by a (subsidiary) nominee company, or otherwise.

Work required

I would take it that the work required to support a reasonable assurance opinion on the adequacy of systems to comply with CASS 6 rules is, in itself, sufficient to form an opinion on the nominee; with the proviso that any identified exceptions must be assessed to determine whether or not they apply to nominee-held assets within the population of custody assets as a whole.

Our (PwC) view is that where a regulated firm holds some or all custody assets registered in the name of a nominee which is a subsidiary of the firm:
all identified breaches or control failures must be assessed to determine whether they relate to nominee assets;
the aggregate impact of any such items must be assessed by the auditor to determine whether the overall opinion on the nominee systems is unmodified, modified ‘except for’ or adverse; and
to facilitate this, the regulated firm should implement procedures within its breach capture process to flag whether individual incidents relate to nominee-registered assets.

It should be recognised that the level of work required to achieve this (both by the firm and the CASS auditor) may be more than has historically been the case.

Download the full article below

Download CASS comment Nominee companies

Chris Sermon

Chris Sermon | Senior Manager
Profile | Email |  +44 (0)7834 254567

 

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