The Client Assets Sourcebook (CASS) – Origins and Objectives

The CASS was instituted by the Financial Conduct Authority (FCA), and represents a fundamental cornerstone in the regulatory framework of the United Kingdom’s financial sector. In the wake of the global financial crisis, there emerged an exigent demand for a more structured approach to ensuring that client assets and monies held by investment firms are safeguarded, particularly in instances of firm failure.

The CASS was established as a response to this necessity, aiming to bolster the protection of client assets and maintain market confidence. Its primary objective is to ensure that firms conduct business in a manner that prevents client assets from being at risk and to expedite the return of these assets if a firm fails. By imposing strict rules on firms regarding the segregation, recognition and reconciliation of client assets, CASS provides a robust protective layer for consumers in the financial marketplace. Its pivotal role in promoting trust and transparency cannot be overstated, as it not only serves to safeguard clients but also to underpin the reputation of the UK as a premier financial centre.

Who Does CASS Apply To?

CASS primarily applies to firms that are entrusted with client money and assets, including:

• Investment Firms
• Banks and Building Societies
• Credit Unions
• Insurers: When they handle client money as part of their insurance mediation activity
• Debt Management Companies:
• UCITS Management Companies:
• Certain AIFMs (Alternative Investment Fund Managers)
• Custodians: Entities that hold and safeguard clients’ financial instruments
• Trustee or Depositary of an AIF or UCITS: When safeguarding clients’ financial instruments

It’s essential to note that while CASS provides a broad framework, its application can vary depending on the precise activities and roles a firm undertakes.

Classifications Of Firms In The CASS

Within the regulatory purview of the CASS, firms are systematically categorised based on the nature and magnitude of their operations concerning client assets. These classifications are paramount as they determine the relevant rules applicable to a firm and the extent of client asset protection. The CASS firm type (small, medium or large) considers the size of client money or custody asset holdings, or both. The classifications, thus, reflect the FCA’s adaptive approach, modulating the regulations based on the risk and scale of operations, ensuring proportionate and effective asset protection. Firms must make an annual notification about the money and assets held in a classification questionnaire in December, to identify whether they are small, medium or large.

• ‘CASS Small Firms’ hold minimal client money or assets. Given their diminutive scale, the regulatory regime for these firms is less stringent but remains adequate to offer necessary protection.
• ‘CASS Medium Firms’ have moderate holdings of client assets. They are subjected to a slightly relaxed set of rules compared to large firms, reflecting the relatively lower risk they pose.
• ‘CASS Large Firms’ typically comprise entities holding substantial client money or assets. Their size and operational complexity necessitate rigorous rules to ensure significant client protection.

More specifically, the following chart gives details of amounts in question on both categories.

The CASS regulations are applicable to all specified firm categories. However, there’s a notable difference: CASS small firms are not mandated to submit a Client Money and Asset Return (CMAR –  a monthly submission to the FCA, providing an overview of a firm’s client assets) nor assign a director or senior manager for CASS oversight. In contrast, both CASS medium and large firms must fulfil these requirements.

CASS Compliance

CASS compliance bears significant importance. Stemming from the aftermath of Lehman Brothers’ downfall in 2008, the FCA prioritised CASS to ensure client interests took precedence over profits. Through stringent regulations, the FCA aims to circumvent future financial controversies, rebuilding public confidence in the financial sector. It underscores the significance of safeguarding client assets through its Principle 10 for firms: “A firm must ensure adequate protection for clients’ assets under its care.”

Violating the FCA’s Principles for Business can lead to severe repercussions, ranging from financial penalties to revocation of authorisation and even criminal proceedings. Such punitive measures can deeply affect a company’s revenue and credibility. Given the heightened individual accountability under the Senior Manager and Certification Regime (SMCR), maintaining compliance is not merely important – it’s imperative.

The Structure and Aims of The CASS

The CASS comprises thirteen primary sections, and each segment addresses a specific area of client asset protection, underlining the mechanisms and strategies for their safekeeping. This article gives a short overview of the sections and their paramount objectives:

1. Introduction: Establishes the primary objectives of CASS, setting out its scope and purpose. It is designed to lay the foundation for the following provisions.
2. Definitions: Outlines the terminologies and technical terms used in CASS. This ensures clarity and uniformity in interpretation and application.
3. General Application: Describes which firms CASS applies to and to what extent. It ensures that all potential firms understand their responsibilities.
4. Client Money: Focuses on segregating and protecting client money. By stipulating segregation requirements, it ensures funds aren’t used improperly.
5. Client Assets: Dedicated to safeguarding tangible assets like securities. It promotes processes for their segregation, registration and reconciliation.
6. Custody Rules: Deals with assets held in custody. These rules are set to prevent misappropriation and to facilitate the return of assets in case of insolvency.
7. Mandates: Relates to agreements that allow firms to control client money or assets. It ensures these agreements uphold the interests of clients.
8. Lien: Concentrates on the imposition of liens on client assets. Its provisions ensure that liens aren’t misused to the detriment of clients.
9. Client Money and Assets Return (CMAR): Outlines the requirements for periodic reporting to the FCA about client assets held. It ensures transparency and timely regulatory oversight.
10. CASS Resolution Pack: Details the records and plans a firm should have for quick and efficient return of client assets upon insolvency.
11. Debt Management Companies: Tailored for firms involved in debt management. It ensures client money in debt solutions is treated appropriately.
12. Life Policy Wraps and Pension Policy Wraps: Caters to firms that deal with life or pension policy wraps, ensuring the protection of client entitlements.
13. Retirement and Distributions: Deals with the steps and safeguards required during firm retirement or the distribution of assets.

Conclusion

Collectively, CASS’s design is not merely regulatory but protective, ensuring that all client assets are shielded from misuse, misappropriation and systemic risks. It represents a monumental stride forward in fortifying the security and trustworthiness of the UK’s financial landscape. By mandating rigorous checks and balances, it instils unparalleled confidence among clients, safeguarding their assets and funds. Yet, the intricate web of regulations also poses challenges. For some firms, especially smaller entities, navigating the complex framework can be resource-intensive and daunting, occasionally leading to inadvertent non-compliances. While CASS’s intent to bolster client protection is commendable and has largely succeeded, a balanced view acknowledges the intricacies it introduces into the operational milieu of financial institutions.