CASS Chapter 1 Application Where & What - Articles 1.3.1-1.4.5

Client Assets – Territorial Limits 1.3.1-1.3.4

Apart from the exceptions stated earlier CASS applies to all firms conducting regulated activities with an establishment in the UK.  Further, those firms (except an insurer) with a branch operating in another EEA state are also subject to CASS.  There is reference to passported activities and these are those activities allowed by the relevant EEA treaties and directives, this will be the majority of those activities that a firm carries out.  The regulated activities in general terms cover the handling of money, mortgages, investments and the advice given regarding such handling.  To give an idea of the diversity most financial institutions will be subject to it but also firms such as food retailers that have diversified into financial products will also be subject to it.

CASS does not apply to an incoming ECA provider acting as such.  What this means is that a firm that has an establishment in another EEA state (not in the UK) but that is providing a service to clients in the UK is not subject to CASS.  This would appear to recognise the lack of sovereignty over firms providing a service from overseas.  It does not clarify whether the same applies to firms operating from out with the EEA, one presumes that CASS does not apply to them either.

The above two paragraphs summaries Rules.

Client Assets - Applicable Particular Activities 1.4-1.4.5

CASS applies to Occupational Pension Scheme Firms, where the customer is the Occupational Pension Scheme or Welfare Trust and the firm acts or intends to act for the benefit them.  IF CASS requires information be provided to or consent from OPS’ or Welfare Trusts then the OPS firm is to do so to all trustees unless the context requires otherwise.  This Rule covers the requirement of an OPS firm to ensure it has fully informed or obtained the consent from those responsible for acting as the trustees of an OPS or welfare trust. But, context may require a different approach.

The following aspects are prefixed as Guidance.  In the case of stock lending with or for clients, corporate finance business and oil & energy market activities, the custody and money chapters apply. Where relevant the collateral rules apply.   Although CASS does not apply directly to a firm’s appointed representative or tied agents the activities they undertake are done so as if the firm had undertaken the activities themselves.  In other words there can be no escaping liability by virtue of having outsourced their activities to third parties.  Reference to links on appointed representatives and tied agents is recommended.  Reference is also made to SUP 12 which details the requirements firms must adhere to with regard to appointed representatives and tied agents.  Note that SUP 12 is rather large and comprehensive and therefore only go into detail if needed.

CASS Chapter 1 Who It Applies To - Articles 1.2.7 - 1.2.13

Client Assets – Application

The following is a continuation of the previous post and it examines further the definition of who is subject to the regulations.

Section 1.2.7 (7) is brief and is marked as Guidance.  The sum of this single sentence is that if a firm is involved in debt management then the CASS debt management chapter applies.  The diagram below summarises this and the link provides the definition of CASS Debt Management Firms.

Section 1.2.8 is also marked Guidance covering retail clients, professional clients and eligible counter-parties.  In summary:

•  CASS applies to all categories of client.
• The Insurance Money Chapter does not distinguish between different categories but the term consumer is used in place of retail client and there are additional obligations that apply.  The objective is for this definition to remain consistent with that contained in the Insurance: New Conduct of Business sourcebook.
• It is clear within the Collateral rules, custody chapter, client money chapter and Information to Clients Chapter whether or not they apply to activities carried out on retail clients, professional clients or both.  Eligible counter-parties are regarded as professional clients for the purposes of the rules contained in the aforementioned chapters.
• The Debt management client money chapter applies to the client category known as customers.
• Retail clients, professional clients as well as eligible counter-parties have no relevance to credit-related regulated activities including debt management activities.

Definitions:

·         Consumer.

·         Customer.

·         Retail Client.

·         Professional Client.

·         Eligible counterparties.

Determining the category that the client falls into is somewhat complex as the links above cross refer out to other well defined terms.  At some point I will develop a table to act as a ‘quick reference’ guide.

Client Assets – Application for Affiliates

Section 1.2.9A is Guidance and offers clarification on the position of Affiliates in relation to CASS.  In short an affiliated company ie one that is part of the same group is still a client of a firm in relation to activities falling under CASS.  This means that if the firm, the affiliate (as client) and the activities meet the definitions then being part of the same group does not remove the obligations required under CASS.  This is with regard to MiFID Business.  For non-MiFID business the application of Custody chapter and the client money chapter of CASS may differ.

Section 1.2.11 is a Rule.  A summary:

• A firm holding money for a client must have a separate client bank or transaction accounts for business as shown below.
• A firm acting as a Trustee firm and a Non-Trustee firm, for the same client, is not allowed to hold money subject to the client money chapter in the same account.  See the diagram below.
• The client bank and transaction accounts subject to the rules above must be separately designated.

 Section 1.2.12 and 1.2.13 are Guidance.  The purpose of the rules are to reduce the risk of confusion between assets held under different regimes either as an ongoing business or in the event of the failure of a firm.  In other words being able to correctly identify the assets and debts attributable to a firm and client so that management or disposal of them can be made with regard to where ownership lies.  In my opinion this has come about due to the reluctance or inability to be able to identify and isolate high risk or toxic debts during the financial crisis, thereby making it difficult to assess the integrity of the institutions holding those assets.

Where the rules allow a firm the option to hold money within the same chapter that would otherwise be held under different chapters then they may do so, but this does not remove the requirements under 1.2.11R(1).  My interpretation of this is that if you opt to hold money in relation to insurance contracts under the client money rules rather than the insurance client money rules then you must still have a separate bank or transaction account that segregates it.  For example if you have a client and have insurance business, some of it may be conducted under the client money rules and some may be conducted under the insurance client money rules but money from both must be in separate accounts and not in the same ‘insurance’ account.  The other aspect mentioned covers ISA cash only deposits being regarded as MiFID business, the same segregation must apply.  For reference the following sections are highlighted: CASS 7.1.3R and CASS 7.1.15BA R.  Take time to read these!

CASS Chapter 1 Who It Applies To - Articles 1.2.2 - 1.2.5

Client Assets – Application & Purpose

Reference: CASS 1

Key (refer to the Reader’s Guide on the FCA homepage under the tab Guides for further details:

R = General rules, specialised rules, listing rules and rules made under other powers.  Rules are binding and may be subject to enforcement and subsequent damages for non-compliance.

G = Guidance.  It is not binding and need not be followed to achieve compliance with the rules.

This post is based on rules and not guidance.

The intent of the first chapter is to define to whom, for which activities and within which territorial limits the rules apply.  Who, what and where?

The rules apply to both regulated and unregulated activities unless defined otherwise within the rules.  The assumption here is that it automatically applies to all regulated activities unless specifically excluded and unregulated activities if specifically mentioned.

It is therefore prudent to assume that you are bound by the rules unless you find an exception or have clarified that your unregulated activity is not specifically bound by the rules. (R 1.2.2).

CASS applies to every firm except those indicated by the diagram below:

References:

FCA Glossary

Financial Services and Markets Act 2000

Non Mainstream Regulated Activities

EEA Firm

MIFID 2 - Markets in Financial Instruments Directive (EU)

Compliance and Regulation - Introduction

Introduction

Why am I writing this blog?  There are two reasons, firstly I wish to enhance my own knowledge of the subject area and secondly I want to simplify the rules so that they are much easier to understand and implement.  I am, if you like, doing the thinking for you.  There is a caveat to this, I am not an expert in compliance however you wish to interpret that, I am learning and developing my understanding as any other reader would do.

I am a qualified and accredited management accountant and my interest is to develop my skills to make me more employable and knowledgeable within the financial industry.  It is primarily in this context that I am writing this blog.

Structure

The title of the blog will give the specific area that I am examining or any subset of that area.  Within the opening part of the blog I will link back to the owner of that piece of work for example, in the case of Client Assets (CASS) I will provide the links and references to the website so that the reader can refer to the original document to either challenge or validate my interpretation of the rules.  I will also, where appropriate, provide a key to support the documents and comments.  Be aware that to get the most recent version of a document then you must consult the original owner, I will update where I can and when prompted.

Definition of Compliance

The definition I am about to give is not specific to any industry or professional body, but it is a common sense application of the term to any situation.  I have referred to the Oxford dictionary as my start point.

Compliance – The action or fact of complying.  It actually means you are in the process of doing as you are told or you are doing as you are told.  For example if I drive within the speed limits I am in compliance.  If I see a sign changing the speed limit from 70mph to 50mph then I will begin to adjust my speed so that I comply with the new limits, preferably before I enter the new zone.

What is missing is the context and there are several obvious areas to which we can group the rules and whether or not compliance is required:

·         What are the rules?

·         To whom to the rules apply?

·         Where do the rules apply?

·         When do the rules apply?

·         Why do the rules apply?

We operate in a global environment but it is subdivided into trading blocs, nations and industries which, of course, overlap.  There is a precedence or hierarchy and often a great deal of duplication.  There are also a frameworks of structures designed to oversee and ‘enforce’ the rules.

What are the rules?

In simple terms let us start with these groupings:

·         UN Mandates.

·         EU Directives.

·         Industry bodies.

·         Professional bodies.

·         National legislation.

·         Social/Ethical standards.

By examining the headers it becomes apparent that some of these rules will be voluntary and some will be mandatory.  Even the mandated rules may be difficult if not impossible to enforce. 

What do I mean by social/ethical?  Well, let us take the recent media interest in corporate and individual tax avoidance.  It is quite within the rules to avoid paying tax by using tax efficient mechanisms to reduce your bill to HMRC, however, it is not socially acceptable that a wealthy individual or corporation pays less tax that the average person on the street.  Should they be penalised?  Tax evasion, it must be stressed, is illegal and is not the same as avoidance.

From the point of view of the corporations and indeed the wealthy individuals, why should they not make themselves more competitive and gain more value from their earnings?  If others had the means or financial support to be able to do the same thing then they too would wish to pay as little tax as possible.  Cash in hand is a common method for paying for tradesmen to do work, it is tax avoidance and therefore illegal, but most people will have done this at some point.  This is not meant to be a debate on the rights and wrongs but merely to point out that the definition of social/ethical rules, as far as I am concerned, is what society will tolerate.  It does not mean that they are obligatory or enforceable.

Most rules come about as a result of:

·         A desire to protect a position or group for example the Corn Laws under the Importation Act of 1855.

·         A desire to raise funding through taxation.

·         A result of some event such as the Financial Crisis of 2008 and the subsequent stress tests introduced to the banking industry.

·         Proactive attempts to regulate organisations or individuals.

These rules are all under the influence to one degree or another of various holders of power and influence.  Naturally they would wish to achieve the best outcome to meet their interests and this inevitably involves conflicting positions.

Why comply?

This is the fundamental question and apart from the stock answer that is ‘you have no choice but to comply’, the more relevant reason is that you avoid punitive fines or loss of value when you are caught in breach of the rules.  Put it simply you get punished and that, in terms of penalties can result in all or some of the following: fines, imprisonment, loss of market share, falling share price, loss of liquidity, collapse of the business or loss of reputation.  There is a balance between compliance and the cost of compliance with the latter extremely difficult to judge in some cases.  The LIBOR and FX market rigging gave rise to significant levels of fines and loss of reputation and share value.  The investors felt the pain as well as the senior staff implicated and responsible although the horse has bolted in these cases, regulation will now catch up to deal with the situation.

The decision to comply will be a risk between accepting the penalty and trying to retain some competitive edge or accepting the need to comply and, in doing so, avoid the penalties.  The main issue with complying is that when the rules are introduced the businesses may not necessarily be in compliance at the time, even given the transition period allowed for in many cases.  Businesses are not keen to acknowledge their failure to comply as this will generate pressure and costs to rectify the situation.

So, with that set as the background I will now, as regularly as I can, contribute towards this blog and analyse relevant sections of regulation.  Just to recap, my focus is on financial regulation, but I may touch on other relevant topics from time to time.