Published 21-Apr-2020 by Alex Davidson, Thomson Reuters - Regulatory Intelligence
Segregation and diversification of client money during the novel coronavirus are likely challenges for some firms just as financial institutions are not functioning fully enough to easily open new accounts, sources said. The Client Assets Sourcebook (CASS) requirements have not disappeared, as the Financial Conduct Authority (FCA) has made clear in a recent statement. As the FCA said, some firms have identified possible operational challenges in meeting segregation and diversification requirements based on any increased holdings of client money.
Some firms have not historically seen the need for diversification, but the client bank account may have limits on the balance held, said Nicola Green, CASS consultant at Bovill, a consultancy in London.
"For firms needing to newly diversify, or to have somewhere to hold money above a maximum balance, the challenges can be huge," Green said.
"If firms don't already have alternative means of segregating client money, such as a client bank account with an alternative institution, they will have great difficulty in being able to set one up at the moment, with banks having limited availability and functionality," she said.
The FCA expects firms to have thoroughly researched the options and to have presented their plan to it, she said. The plan should include why the firm has disregarded any available options as well as the reasons for the selected one.
"We may see changes in client behaviour concerning requests to withdraw funds. Firms that use term deposits should consider those arrangements and whether to revise their policy on their use to ensure that adequate liquid CASS resources are available," Green said.
The FCA said in its statement a firm must bank a cheque into a client bank account within one business day and before that hold it securely and record its receipt. Where the novel coronavirus makes this logistically difficult, it expects firms to take mitigatory steps to ensure client asset protection. If a client has sent a cheque to an office and the firm is unable to access it, the firm can ask the client to cancel the cheque and to make a bank transfer instead, Green said.
The firms facing the biggest challenges will be those accepting transfers of ISAs, pensions, and general investments, she said. "Firms should work together to minimise the number of cheques being sent from firm to firm."
Some firms are concerned the situation could lead to additional breaches needing to be reported and that CASS audit reports could become more expensive, according to the FCA.
"CASS auditors usually group multiple breaches in their reports, avoiding the need for extensive repetition and additional cost. We have not heard from auditors that reporting on extra breaches would result in significantly increased costs of audits," the FCA said.
Green expects audit reports now will include more breaches than might otherwise be the case. Because firms will self-identify most of the breaches, she expects this to have little impact on auditors' time or resources; however, the opinion given in the audit report may be affected if the breaches take the audit outcome from qualified to adverse.
Where business continuity processes are built around flexible software, an increase in CASS breaches due to business interruption can be avoided, Jessica Porter, CASS consultant at AutoRek, said.
"Firms still operating paper-based processes may find effective working throughout this period a bigger challenge," said Porter, a former CASS analyst at Barclays Wealth Management.
The FCA said some firms had reported difficulties reconciling physical safe custody assets because they could not access the location where the assets are held. Firms are required to reconcile such assets against the firm’s internal records at least every six months. If this should give rise to coronavirus-related logistical difficulties, it expected firms to take mitigatory steps to protect client assets.
"Clearly, if a firm is due to carry out its physical reconciliation while unable to access the office, this will make things very difficult," Green said.
"For firms that carry out a physical reconciliation more frequently than once every six months, it may be possible to reduce the frequency during this time, on the basis that the transaction flow for physical assets is likely to reduce," she said.
If a firm is unable to carry out the reconciliation when due, it is required to report a breach to the FCA.
"Where a firm feels that it may not meet its obligations due to not being able to access the physical assets, a prudent segregation approach could be used to ensure client protection, but this would not itself mitigate a breach," Porter said.
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