“Take a deep breath - are you OK?…..are you really OK!?” - Dear CEO letter: Adequate Client Asset Arrangements
11 November 2020
In any economic downturn, the CASS risk faced by firms goes up alongside the risk of insolvency. It’s more important than ever for firms to pause, take a breath and ask themselves twice - are you OK? are you really OK?
It is the responsibility of CASS senior managers to ensure their firm’s people are performing their roles within the overall control framework diligently to ensure firms have accurate records, a robust control environment and adequate organisational arrangements to protect client assets.
The FCA has sent four ‘Dear CEO’ letters to regulated firms over the past few months in light of the impact of COVID-19; seeking to remind regulated firms and senior management of their obligations on a number of topics including: inappropriate use of title transfer collateral arrangements & regulatory permissions for financing transactions, high client money balances, adequate client money arrangements for general insurance intermediaries. The most recent was on 30 September 2020: Adequate Client Asset Arrangements.
The letter can be viewed via the link below.
Dear CEO letter: Adequate Client Asset Arrangements
So…why has the FCA decided there is a need for this now?
It is clear that the FCA is concerned about regulated firms and their ability to maintain adequate organisational arrangements to safeguard client assets. These topics are not new - these are all fundamental principles of the CASS rules, which the FCA has been discussing with firms over the past 12 to 18 months, even before the COVID-19 pandemic.
It is not surprising that the FCA continues to be focused on some of the topics raised. In our analysis of PwC CASS opinions issued in the last year, we noted:
- 44% of firms had acknowledgement letter breaches
- 61% of firms had CASS 6 books and records breaches
- 59% of firms had CASS 7 books and records breaches
- Between 20% and 30% of firms had organisational arrangements breaches resulting predominantly from system issues and inadequate outsourcing arrangements.
What should firms be doing in response to this?
Since there is nothing new in this letter and all firms will already have clear, detailed policies, procedures and controls in place for each of the topics raised by the FCA - there is nothing more to do, right? Wrong.
Firms might feel that they have the appropriate arrangements in place and therefore construct a response consisting of documenting their current policies and processes in these areas, and having this reviewed and approved by the firm’s governing body and/or CASS governance forum. However, the FCA has used the Dear CEO route to ensure the letter and topics within are given the highest level of attention by firms, and therefore should not be taken lightly.
The FCA have written this letter for a reason. They are concerned about the combination of higher client money balances, economic uncertainty and complacency. Firms should take this as a sign they should take another hard, detailed look at their organisational arrangements to ensure they are comfortable in light of the changing environment and risk profile. This could include reviews performed by the CASS governance function, internal audit, compliance or a third party on the specific focus areas raised by the FCA; and should be treated as an opportunity to really challenge whether the arrangements in place are appropriate, as opposed to a checklist exercise to respond to the FCA.
So if you read the FCAs letter and your reaction was that you don’t need to change anything, perhaps it’s time to ask again whether that is really the right answer.