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Client Assets Protection Roundtable

 

The end of October saw the Client Assets Protection Conference, 2014 held across three days in London. The conference brought together leading individuals from compliance, risk and finance operations functions across the investment management and financial services industries to discuss CASS requirements and the protection of client money and safe custody assets.

The conference was particularly timely given new rules published by the FCA relating to the protection of client money and assets, of which the deadline for full compliance is 01 June, 2015. Cashfac attended the conference and caught up with a few of the speakers to get their views on some of the challenges and opportunities that will arise as a result of the new FSA Client Asset rules as well as the key topics, issues and themes to come out of the conference.

Karen Bond, Director, Walbrook Partners

Walbrook Partners provide subject matter expertise on business strategy, operations and the practical application of regulatory requirements and changes to the Financial Services industry.

Chris Golland, Head of CASS, Standard Life

Standard Life Group is a leading long-term savings and investment specialist responsible for the administration of over £254 billion worth of assets and directly looking after around six million customers worldwide, while supporting a further 16 million customers through its Joint Ventures.

Paul Freeland, Senior Consultant, Cashfac

Cashfac helps corporations and institutions to better manage client money; across multiple bank relationships, large numbers of bank accounts, operating across geographically dispersed locations and serving large volumes of clients.  The company’s software and Cloud services deliver transparency, control and compliance to the cash management lifecycle.

 

Roundtable discussion

The FCA’s new Client Asset rules marks the most significant policy shift related to clients’ monies in recent years. What are the main challenges and opportunities that have impacted firms as a result? 

KB: There has been more focus on the limitation of the delivery versus payment (DVP) exemption for fund managers than any other area. While it is true that for fund managers this is the most significant change, there are other areas which represent material shifts that are only now beginning to get real attention. At the top of this list is the impact of the FCA’s requirement that intra-day exposures be minimised. The principle of not using Peter’s money to pay Paul is perfectly reasonable but without having the ability to mandate banks’ intra-day timings, the result will be a very significant funding requirement for all business not covered by the DVP exemption, or else possibly a need to pay clients at least a day later than they would be paid today.

 

CG: It is true the FCA have taken the opportunity to review the Client Asset rules and close many of the “interpretation” gaps that have existed resulted in firms operating within the written rules but outside of their intended purpose. This is none more so true than in the area of cleared funds. Until now firms have operated to an end of day cleared position but the FCA have now made it clear that at no time should a firm use one client’s money or assets for any other client’s transactions, or as they have put it, firms should ensure Peter’s money is not be used to pay for Paul’s transactions.

It is now clear that the FCA expect firms to ensure all the appropriate organisational arrangements are in place to prevent the use of a client’s money before it is actually received. Therefore while the FCA have said that real time internal client money reconciliations are not required the requirement to monitor real time client money balances, to prevent shortfalls, is an inevitable requirement. The impact of which will be increased corporate funding and therefore an increased cost of capital for many firms.

At this stage firms appear to be struggling to identify many opportunities being thrown up from the changes required.

PF: Picking up on Karen’s point that principle of not using Peter’s money to pay Paul is perfectly reasonable – the challenge that many firms still have is differentiating between Peter and Paul’s money at the outset. All too often the systems used to collect cash are outdated and don’t easily enable the recognition of client money, then once recognised they typically fail to provide adequate segregation.  That’s where our solutions excel, Cashfac’s technology enables firms to track, control and segregate client money at all times during the normal business cycle. The firm’s cash is separated with continual internal and external reconciliation  demonstrated in a transparent way.

 

You spoke at the recent Client Assets Protection Conference at the end of last month. What were the key elements that you discussed during your speaker slot?

KB: The requirement to analyse funding requirements was the key element of my presentation. The formality of this assessment which is now required by the rules will require firms to think carefully about transaction flows and timings in conjunction with all of the exception scenarios which could give rise to shortfalls. As with many of the new requirements, the involvement of senior management in this funding requirement process will be significantly increased as the requirement to create and maintain formal policies around prudent segregation are implemented.

CG: I talked to two separate topics: “Best Practice Industry Approaches to CASS Governance and Oversight” and “Demonstrating Robust Client Money Controls around Outsource Business Processes”.

All CASS medium and large firms must have an individual approved for the CASS operational oversight function (CF10a). I spoke about the role of the CF10a itself and the FCA’s expectation of the role in terms of job description, whether the role is a dedicated CF10a, the expectations around technical knowledge, budget, and the level of influence CF10a’s will have within a firm. With this oversight role come a number of factors that firms need to think about, including the Governance structures that need to be in place within the firm to evidence regular oversight, how information is presented and how the CF10a ensures accountability throughout the firm. Training is also important and how the CF10a ensures every member of staff is trained and understands their role and the significance of CASS compliance.

In terms of robust client money controls around outsourced processes I spoke about the expected level of effort required to oversee third parties and should a firm have all operational processes in-house, for example, self custody assets. I also spoke on how firms ensure the third party has the correct governance to capture CASS breaches and ensure root cause analysis is performed to prevent future breaches, as well as what signs should firms look out for to identify when the third party is not operating in an effective CASS compliant manner.

PF: As a CF10a having confidence in the systems that underpin the companies client money processes is essential. Chris mentions the importance of robust controls – if these controls arent codified into the business, part of the underlying systems blue print then the concpet of robustness disappears.  Hence at the conference we were speaking and demonstrating to clients the way in which detailed narrative of every single transaction can be used to create a granular audit trail for the firm. Once that’s in place it creates the basis for improved management information and reporting.  Combining the reporting with relevant, configurable dashboard presentation enables CF10a’s to demonstrate compliance whilst continuously monitoring, in real time, the daily cash processing of the firm’s operation.

What were the salient topics are and key takeaways from the Client Assets Protection conference?

KB: The two topics which every speaker picked up alongside the many subjects covered were training and governance. Training becomes even more essential in the context of rule changes which frequently are simply restatements or clarifications of existing rules. Poor implementation of those rules due to lack of knowledge is likely to be even less tolerated by the regulator in future. Evidencing strong governance, which goes from front line staff through to firms’ governing bodies, is another key feature of the new rules. The engagement of senior management, over and above that of the CF10a, will be needed in order to ensure that firms embed CASS into their normal business practices. The FCA are looking to lay down a framework within which this can happen and expect to see CASS compliance as part of the culture of the firm.

CG: The FCA requires strict compliance with the CASS rules and will take action against firms and individuals where it deems they have operated outside the rules. Fines are on the increase and the FCA is no longer focused only on non-compliance of client money rules but also on the impact of non-compliance of client assets. Non-compliance post 1 June 2015 is not an option. Audit firms will be auditing to the new rules from 1 June 2015, as will the FCA is their next thematic review when visiting firms.

Arrangements between Group entities must be appropriately documented and firms need to perform a detailed gap analysis of their current processes and the new CASS rules. Insolvency can occur at any time of day (as was seen with Lehman and MF Global) therefore intra day compliance is key to protecting client assets.

Boards must be given regular updates on CASS and must be able to understand the significance of the message. MI and training are also key to ensure firms operate in a compliant manner and maintain a compliant model, and MI to identify when and where issues have arisen.

PF: The complexity of complying with the evolving regulation is only increasing.  The board level attention it is now receiving is driving a greater level of investigation which, whilst challenging for firms, is ultimately good for the end client. As a software vendor we can help to support a company’s client money practices – supporting their compliance with regulation and providing an audit trail of every action and movement of client money.  We can build software to support these processes – Cashfac’s flexible workflow driven configuration means it can easily be adapted to suit firms required operating processes and protocols – but not before the firm has clearly defined them.  Only when staff are fully trained and aware of the implications of the evolving regulation can we support them; that’s why events like this are essential.

 

The third and final stage of rule introduction takes place in June 2015. What does the future hold and what can the market expect following this deadline?

KB: It is likely that the FCA will review firms’ implementation of the new rules, so we can expect some warning shots with the potential of fines to follow, where firms have not considered or implemented all of these changes as they should. A potential issue that firms will face in the first year or so after implementation will be differing interpretations of these rules by auditors and the regulator. We heard at the conference that there are already some varying views on the meaning of some of the requirements and that the FCA has not yet clarified others. In these situations, the best that firms can do is rely upon Principle 10 and their own good judgement, though documenting the rationale for decisions made as part of the implementation project is a good idea.

If clients are impacted by changes to settlement dates as a consequence of avoiding intra-day exposure there could be some consumer backlash. However, the main focus of the industry will probably move to European legislation and consequential impacts on CASS processes. This industry never stands still!

CG: CASS is not going away and the future holds much tighter regulation. There will be larger fines for firms and CF10a’s for non-compliance and non-compliance post 1 June 2015 is not an option. Firms should also be considering whether outsourced processes should be brought in-house.

PF: Undoubtedly the future will see more fines in store for firms struggling to adjust rapidly to the tightening regulation.  Those firms that address the regulation will not only avoid the fines and the reputational damage that accompanies them, but also be seen as a preferred and trusted business partner by their clients. Cashfac’s solutions have been helping our clients manage client money for more than a decade – we know from our clients that having robust, best practice, compliant practices makes a real difference.