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)