Karen Bond. Walbrook Partners. CASS 6 Cinderella and Sleeping Beauty. albrook Partners. Meeting the challenges of CASS requirements for June 1st

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1 @uktisa Karen Bond Walbrook Partners CASS 6 Cinderella and Sleeping Beauty albrook Partners TISA CASS Seminar February

2 Sleeping Beauty? Who s been caught napping? FCA regulated firms manage over 90 billion in client money.. and 11 trillion in client assets Walbrook Partners Limited Page 6 Cinderella CASS 6 has been the Cinderella of the CASS regulations with little fundamental change since 2007 CASS 7 was almost double the length excluding the distribution rules Most of the focus and legal wrangling - from Lehman and other failures was on client money But Many firms have failed to understand the CASS 6 rules, with widespread failings in, for example: Funding for custody shortfalls Maintaining internal records of assets held Reconciling physical assets Walbrook Partners Limited Page 7 2

3 Cleaning Up Three areas in which the cobwebs have been cleared: Reconciliations Custody Shortfalls Physical Assets Walbrook Partners Limited Page 8 Reconciliations - a few FAQs What s an internal custody reconciliation? The rules today refer to internal custody reconciliations, but then only describe these in terms of total count and rolling stock method which h are generally applicable to physical stocks. Many firms have otherwise ignored this requirement. How often should we reconcile? Post MiFID, the rules simply stated as regularly as is necessary. For some types of holding, this has been interpreted as once every 6 months When is the firm responsible for discrepancies? The current rules require firms to make good shortfalls when there are reasonable grounds for concluding the firm is responsible. Interpretations have varied from always to never. Walbrook Partners Limited Page 9 3

4 Reconciliations Reconciliation as with client money needs to cover both internal and external checks Historically, i many stockbrokers k and wealth managers had systems which h contained two records: The assets held by each client, recorded client by client; and The assets held within the nominee, listed asset by asset Where these records exist, a three-way reconciliation can be performed: Client holdings vs firm s record of assets in the nominee; and Firms nominee records vs external statements Walbrook Partners Limited Page 10 Reconciliations Today, many firms lack the middle record a separate internal record of the holdings in the nominee The internal system evaluation method of performing internal custody record checks may be used instead The requirement is to evaluate the completeness and accuracy of the firm s internal records; and To evaluate whether the firm s systems and controls correctly identify and resolve all discrepancies Those discrepancies and their causes must then be corrected Walbrook Partners Limited Page 11 4

5 Internal System Evaluation Method There are challenges: While pre-authorising of the ISEM is not a requirement in the rules, it would be a brave firm that waited a whole year to get an auditor review of its approach The exercise has to be completed every month Some discrepancies arise from systems limitations or issues how long would it take and how much would it cost to resolve these? Walbrook Partners Limited Page 12 Shortfalls When is the firm responsible for discrepancies? CASS (3) If the firm, where justified, concludes that another person is responsible for the discrepancy, regardless of any dispute with that other person, or that the discrepancy is due to a timing difference between the accounting systems of that other person and that of the firm, the firm must take all reasonable steps to resolve the situation without undue delay with the other person. Until the discrepancy is resolved the firm must consider whether it would be appropriate to notify the affected client of the situation, and may take steps under (2) for the treatment of shortfalls until that discrepancy is resolved. The burden of proof has increased also the actions required Walbrook Partners Limited Page 13 5

6 Shortfalls When the firm is responsible for a shortfall, it has two choices: Segregate the same assets, or assets to that value; or Segregate cash Revalue as regularly as necessary, and having regard to Principle 10 In practice, we expect this is likely to mean no less often than each time it undertakes a reconciliation in which that valuation is used. For example, where a firm segregates its own money as client money to cover a custody shortfall, that firm will, as part of its internal client money reconciliation, need to revisit the valuation each day to ensure it is segregating the correct amount of client money to cover the shortfall each business day. FCA: PS14/09 Walbrook Partners Limited Page 14 Physical Assets Counting it up Checking it matches the client requirement Walbrook Partners Limited Page 15 6

7 Physical Assets the Challenges Most firms do not have separate records of clients entitlements to physical py assets often because they are considered to be valueless Frequently, firms find certificates tucked into dusty corners which have been long forgotten how does an ISEM cater for that? If a discrepancy arises when a certificate is mislaid, how can the shortfall be valued? How should private equity shareholdings be reconciled quantity is often meaningless? How can firms prove that certificates have no value and therefore dispose of the problem! Walbrook Partners Limited Page 16 In conclusion CASS 6 has been the Cinderella of the regulations, but can be ignored no longer ignored no longer A few key points have been discussed today there are more The FCA has stated that its focus on client assets has intensified and will continue Make sure your firm is not the one caught napping! Walbrook Partners Limited Page 17 7

8 Contact Details Karen Bond Director Mobile: +44(0) Mark Lester Director Mobile: +44(0) on Twitter.and please support our sponsored Guide dog, Cassie! Bond2 Walbrook Partners Limited Page 18 8