Client Assets: "CP12/15 and Changes to the CASS Oversight, Reporting, and Client Mandate Rules"

CP12/15 proposes a number of minor alterations to the Client Asset rules for oversight and reporting (CASS 1A), the CMAR form (SUP 16), and the client mandate rules (CASS 8). Many of the changes simply rephrase existing rules; but the more substantial changes are summarised below.

Proposed Changes to CASS 1A (Oversight and Reporting Requirements)

CASS 1A divides up firms which are subject to the FSA client money requirements (CASS 7) and/or client custody requirements (CASS 6) into small, medium and large firms. These categories are then used to determine what sort of operational oversight is required; and (in SUP 16) whether or not a CMAR must be completed; if a CMAR is not required, CASS 1A establishes what information firms must still send to the FSA ever year.

Some of the more substantial changes proposed are:

• An express exemption from CASS 1A for firms which are subject to CASS 6 (see above) merely because they arrange the safeguarding and administration of assets (1A.1.1.R). Formerly, such firms were often unsure as to whether or not their activities fell within the scope of CASS 1A.
• A small firm which elects to be treated as a medium firm (or medium firm which elects to be treated as a large firm) can now notify the FSA in writing, in a letter marked “Client Assets Firm Classification”, rather than having to be made in the CASS 1A.2.9.R. annual statement of funds held (1A.2.5.R., 1A.2.13.G.).
• Precise rules as to when a change to a firm’s CASS firm type (i.e. small, medium or large) will take effect (1A.2.12.R.), which will depend on the firms’ timing and method of notification.
• New measures are put in place for the situation where a firm becomes a medium or large firm but does not have a director or senior manager approved to exercise the CF10a CASS operational oversight controlled function, and so cannot fulfil the CASS 1A.3 oversight requirement for this reason. Under the proposed new rule 1A.3.1C.R, such a firm must comply with CASS 1A.3 as soon as practicable (and submit an application for a candidate for the CASS oversight function within 30 days) while assigning a director or senior manager to oversee CASS compliance in the meantime. (Note that this only applies to a firm becoming medium or large ‘automatically’, via the annual determination of 1A.2.2.R(1), rather than by election under 1A.2.5.R.)

Proposed Changes to CASS 8 (Client Mandate Rules)

CASS 8 applies when firms ‘control’ rather than ‘hold’ client money, e.g. where a firm has authority over a client’s bank account. It applies to investment and other MiFID firms, as well as insurance intermediaries (except for reinsurance) and briefly sets out a few high-level rules, requiring adequate records and internal controls over how the firms use these client mandates. Possibly because of their brevity, the FSA identified “a large degree of inconsistency” in how the CASS 8 rules were understood.

The CP12/15 proposed changes to CASS 8 expand this section of the Client Assets sourcebook considerably, although the FSA states that their practical effect will be “in effect, deregulation”.

• The main addition is a precise definition of ‘mandate’. This is “any means that give[s] a firm the ability to control a client’s assets or liabilities” which meet several conditions: they are obtained by the firm from the client with the latter’s consent; in writing (but in no particular form); retained by the firm; and allow the firm to give instructions to third parties in relation to client money held on account (or any money or assets held by them to which the client is entitled) or to incur debts or other liabilities on behalf of the client; and this without requiring the client’s further involvement (8.2.1.R.)
• It will also be clarified that the mandate rules do not apply to a firm in relation to client money held in accordance with CASS 5 or CASS 7, or assets held in accordance with CASS 6; or to the operator of a regulated Collective Investment Scheme (‘CIS’); and they do not affect the duties that a third party owes to a client whose has provided a firm with a CASS 8 mandate.

The scope of regulated business to which the mandate rules apply remains unchanged, however.

Changes to SUP 16 and CMAR (the Client Money and Asset Return)

The CMAR must be completed every month by medium and large firms (as defined by CASS 1A) and submitted to the FSA.

CP12/15 proposes some minor amendments to the CMAR form, which are as follows:

• A firm which changes its categorisation to a medium or large firm is not required to submit a CMAR in respect the month in which the change took place (16.14.3.R).
• The definition of ‘safe custody assets’ – one of the details that must be recorded in CMAR – is amended to include only assets to which the CASS 6 custody rules apply in relation to the holding of financial instruments in the course of a MiFID business, or else the safeguarding and administration of assets (without arranging) in the course of non-MiFID business (16.14.4.R.).
• The CMAR form itself (SUP 16 Annex 29R) is amended as follows:

-to include the qualification “…during the reporting period” to various items in Section 1 (Firm information);

- to change the GABRIEL validation of data field 8B (‘Overview of firm’s activities subject to CASS’) to allow for a firm to report zero clients, where applicable;

- to remove the “Where & how held?” column in Section 6 (Segregation of safe custody assets) and replace it with two new columns, “How registered?” and “Where held?”;

- to replace the two instances of “Following reconciliation is the firm unable, in any material respect, to comply with the requirements in CASS [rule]” in Section 8 (Record keeping & breaches) with “If yes, was a notification made to the FSA”?

CP12/15 also proposes to rewrite the guidance for completing CMAR, which is beyond the scope of this document.

Consultation

The FSA has opened a consultation on the proposed amendments above. The deadline for responses is 30 September 2012. The outcome of the consultation, with the final rules, will be announced in November 2012. The final rules should come into force on 1 January 2013.

http://www.law-now.com/cmck/pdfs/nonsecured/casscp1215.pdf