January 31, 2019
There is no doubt that we are now entering a period of consolidation for CASS. There are no signiﬁcant regulatory changes in the pipeline, and while we are unlikely to see any falling off in CASS audit standards, it does not look as if there will be any additional burden either.
Despite this, ﬁrms must keep their eye on the ball. The recent failure of Beaufort Securities had a signiﬁcant and public impact on investor conﬁdence in the CASS rules and the level of protection they afford. This highlighted how quickly the hard work of CASS ﬁrms can be undone in the eyes of investors.
There is also now a chance for ﬁrms to ‘clean up around the edges’; mandates (covered in CASS 8) are an area we see as likely to be subject to further scrutiny as auditors look for new issues to make recommendations on now that CASS toolkits are operational.
CASS audit: Consolidation needs to reduce burden on time and resources
Greater consistency in audit scope, costs, and approach would make life easier for ﬁrms. In a recent industry survey, 58% of ﬁrms said that the CASS audit was one of their biggest challenges, half said it was one of their biggest costs, and 78% agreed or strongly agreed that auditors should be able to apply materiality on breaches in annual CASS audits.
All ﬁrms have now been audited at least once under the new FRC Assurance Standard. There are some concerns about differences in approach and interpretation between firms of auditors, and many firms would like to see some level of materiality applied in CASS audits.
Industry research shows that auditors are still relying heavily on ﬁrms’ documentation and that the CASS audit retains a strong controls focus. The documentation requested by auditors now seems fairly consistent with requests for the following being common for CASS audits: CASS rules and controls mapping and process maps, procedure and policy documents, CASS governance terms of reference and CASS MI.
The growth in software tools is driven by CASS Large ﬁrms. Some ﬁrms are using a software tool to store CASS controls while others are using an Excel CASS matrix for this purpose.
The number of key CASS controls is related to a firm’s CASS footprint as one would expect; however, there is a wider than expected distribution of the number of key controls ﬁrms are recording. On average, ﬁrms record three key controls per CASS risk identiﬁed but there is a signiﬁcant distribution which is likely to be an interesting benchmark. Most ﬁrms have fewer than two key controls per CASS risk identiﬁed but nearly 1 in 5 has ﬁve or more.
Good governance is a key aspect of CASS compliance and with the implementation date of 9th December 2019 confirmed for the Senior Managers and Certification Regime for solo-regulated firms, it will be an especially hot topic for some. With a little over a year to go, this regime is set to reinforce CASS oversight requirements and set expectations for consistent governance standards for the industry.
There appears to be a greater consensus evolving around the frequency and trending period for CASS MI. Monitoring CASS MI on a regular basis is essential to enable firms to prevent and/or anticipate breaches and the CASS oversight head will need to heavily rely on this practice in order to fulfil their duty of responsibility effectively.
With a few Medium/Large CASS firms indicating that they only review their MI on a monthly basis, this might not live up to the regulator’s expectations for SMCR. The same observation applies to MI trending analysis, which firms will need to introduce on a more regular basis in order to support a forward-looking management framework for CASS activities.
Many firms will have invested in IT solutions for their CASS-related processes this year. Top of the list for investment are reconciliation processes, with many firms having chosen to strengthen their controls by investing in systemic reconciliation tools or software solutions that support a CASS toolkit.
The use of unbreakable term deposits
Some firms are making use of unbreakable term deposits for holding client money and some firms are able in this way to greatly improve the return on client money held.
Key points to note are:
- Firms can hold a proportion of client money in unbreakable deposits for up to 95 days, subject to certain conditions (see CASS 7.13.13R)
- Should a 95 day unbreakable deposit expire on a non-working day in the UK, this will be a breach
- Conditions include disclosure to clients and having a policy on the proportion of client money held in this way (see CASS 7.13.14A R).
Returning unclaimed client money and assets
It is understood that many firms continue to hold unclaimed client money and/or unclaimed client assets. However, a significant proportion of firms have been able to remove these balances and hence reduce the compliance burden of maintaining them.
The UK’s EU withdrawal
We are not aware of any direct CASS impact; however, there may be business changes, such as legal entity restructuring which CASS teams need to plan for, especially where regulatory permissions, i.e. CASS scope, are concerned.
- Contractual migration – contracts with clients or third party providers may need to be updated or migrated; these will need the usual CASS checks and an understanding of their impact
- Outsourcing – restructuring may lead to outsourcing to group entities where it did not previously exist and this should be reviewed and handled in the same way as existing outsourced relationships
- New products – any product changes caused by EU withdrawal will still need to go through the usual controls, including a review of the CASS impact
- Employee relocations – it is important to be aware of any key person dependencies and there may also be outsourcing implications
- Scaling up or down – there could be scaling up or down in certain products or markets. Do firms have sufficient CASS expertise in these areas to meet demand and are controls robust enough to cope?
- CASS toolkit – firms will need to ensure all changes are being reflected in their CASS toolkit, with a full audit trail and rationale where appropriate.
How can Thistle help you?
Thistle will continue to keep this area under review and will issue further updates where necessary.
We do offer a CASS gap analysis that you can use to track your controls and compliance with the rules and provide to your CASS auditors at the time of the annual audit. We have a suite of template documents that you can tailor and use to record your client money and custody assets processes and, where required, we can undertake a detailed internal audit by a CASS specialist to ensure that you are fully prepared for the CASS audit. Along with this, we offer a number of compliance services and support solutions.
Please contact us if you need assistance in relation to any of these issues.