“Trust, but verify” (Ronald Reagan)
The requirement to have a CASS Resolution Pack (CASS RP) came into force for CASS firms in October 2012 and is governed by Chapter 10 of the Client Assets Sourcebook (CASS 10).
At its simplest level, the CASS RP is an up-to-date blueprint of the firm’s CASS operations and Client Asset records. It helps insolvency practitioners or external parties understand the firm’s CASS arrangements over client money and safe custody assets held by a firm to be able to return them quickly to end clients. The CASS RP seeks to bring together all relevant CASS information in one place and, depending on the specific document, CASS 10 stipulates it must be retrievable immediately or within 48 hours.
The doctrine of protection of Client Assets is enshrined in the FCA’s Principles for Business (Principle 10) - “A firm must arrange adequate protection for clients’ assets when it is responsible for them”. To paint a picture of the sheer scale of the task in the UK, it is estimated that there are 1,500 investment businesses holding in excess of £100 billion of client money and £11 trillion of safe custody assets - greater than the GDP of China in 2013.
Fundamentally, each and every one of us (whether acting in a personal or professional capacity) expects and trusts the firms with whom we deposit money or assets subject to CASS requirements to protect and return those assets to us in the event of insolvency. We trust that our money and assets are adequately protected and segregated in case the worst happens.
The lessons of Lehman Brothers and MF Global continue to remind us of the critical importance of the application of CASS rules and that failure of financial services firms is no longer a hypothetical construct but a potential reality.
Somewhat paradoxically, the effectiveness of the CASS RP (alongside the rest of CASS rules) can only be truly evidenced in the event of insolvency. Nothing can be more important for each and every one of us than firms creating a fit for purpose CASS RP that guides and signposts an external party to the relevant CASS information such that our money and assets can be retrieved and returned to us on a timely basis if the worst happens.
The FCA has significantly increased its focus on the design and effectiveness of CASS RPs and is routinely giving firms 48 hours' notice to spot-check/review their CASS RP. However, despite the increased regulatory focus and the basic tenet of safeguarding Client Assets, firms continue to struggle with the production and upkeep of a fit-for-purpose CASS RP. Some specific topics identified include:
Mindset
Firms should produce and upkeep their CASS RP with a mindset that it will be used in the event of an insolvency.
Common issues include creating a CASS RP with no high-level instructions, assuming that all key dependencies will be present in the event of insolvency and assuming the insolvency practitioner will have the same level of knowledge of the business as current staff.
Content
Firms must ensure that their CASS RP contains all the documents required in the Core Content Requirements and Existing Records Requirements.
Common issues include CASS RPs that contain missing or out-of-date hyperlinks, material changes are not reflected within the CASS RP in a timely manner and documents do not meet CASS 10 requirements.
Governance
Firms are required to ensure that they review the content of their CASS RP on an ongoing basis to ensure it remains accurate and any material changes in circumstances must be reflected in the CASS RP within five business days.
Common issues include firms not updating their operational processes to consider the CASS RP upon a change of circumstances, senior management and other stakeholders with insufficient knowledge and appreciation of CASS, a lack of CASS oversight by senior management, lack of clarity of ownership and responsibility for CASS matters and the omission of the CF10a to report annually to the governing body on compliance with CASS 10.
Structure
Firms should have a separate CASS RP for each applicable entity. The CASS RP should be easily accessible to an insolvency practitioner, the documents should be clearly labeled and easily located and firms must have a robust control framework to support the timely and accurate retrieval of documents.
Common issues include a complete CASS RP which cannot be accessed by a third party (e.g. it requires a staff login), a reliance on systems that would shut down upon insolvency, digital folder structures that make it unclear which document is part of the CASS RP and a lack of clear instructions for a third party seeking to understand the CASS RP and wider CASS operations.
This year will no doubt see a continued focus by the regulator on the CASS RP. The mindset of some firms will need to shift from seeing the CASS RP as an unnecessary box-ticking requirement to a strategic risk management tool that is fundamental to Principle 10 of arranging adequate protection for clients’ assets.
Duff & Phelps' Regulatory Consulting team has significant experience in designing and implementing CASS frameworks and is regularly appointed by firms to review all or part of their CASS arrangements or to undertake Skilled Persons reviews.
Duff & Phelps can help your firm:
- Undertake a gap analysis of its CASS RP against FCA requirements and best practice
- Conduct a simulated FCA visit or mock insolvency scenario to test the effectiveness and resilience of the CASS RP
- Assist your firm in building its CASS RP
- Enhance your firm’s governance and reporting framework with respect to the CASS RP
- Provide tailored training to key CASS stakeholders and senior management
Work with you to turn the CASS RP into a strategic risk management tool.
