A dedicated bank account for your clients is a beginning, but what matters is whether you are able to demonstrate that you safeguard the proper sum of client money, have well-kept accounts and conduct reconciliations efficiently. Your firm should be able to research and fix any differences which occur too. All the tasks are fundamental to FCA client money rules from the CASS 7 part.
For finance directors, compliance officers, and those responsible for CASS, the controls need to be effective all year round, and not only when the auditors ask for proof of control.
Who should read this guide?
This article deals with investment firms regulated by CASS 7. It deals with client money segregation using the normal approach, along with the reconciliation rules and record-keeping under it. For those that use the alternative method, there are certain conditions that they need to follow. The alternative method does not give firms a general right to route client money through an operating account.
What does client money segregation require?
Under the normal approach, it is required that the firm pays client money directly into a client bank account instead of receiving it first into its own bank account, unless an exception exists under the CASS rules. The client bank accounts should also be identifiable and kept separate from the bank accounts where the firm’s own money is held.
Segregation also requires proper maintenance of internal records. It is required that the firm is able to identify money belonging to one client from money belonging to other clients and from its own money, at all times without delay. Maintaining a good bank balance by itself is not enough. The internal record of the firm should also accurately reflect the client money held.
Control failures your firm should check
Below are some realistic examples of potential control breakdowns, and not the list of most common regulatory observations.
| Control failure | Its importance | What to do |
| Customer receipts are booked into the operating account | The normal approach contradicts this statement except where an exception arises. | Check payment instructions and the real path taken to get customer payments. |
| Client money is received before the required bank acknowledgement letter is in place | Subject to the specified exceptions, the firm must receive a duly countersigned letter that clearly identifies the account before holding or receiving client money into it. | Make receipt and review of the compliant countersigned letter a control before the account is used |
| Bank reconciliation is viewed as an internal reconciliation | Internal reconciliation needs to be done based on the records of the company only. Bank statements cannot be used in place of these records. | Ensure that internal and external reconciliations are documented separately. |
| Shortfalls are yet to be resolved | Shortfalls concerning internal reconciliation are going to need the company to put money into the bank account of the client on the day of reconciliation at close of business. | Delegate the task of looking into discrepancies, securing funds, and meeting the deadlines. |
| Unallocated receipts or spreadsheet adjustments have no supporting documentation. | The records must document all transactions involving the client’s money and must include a reliable audit trail. | Documentation should be kept, adjusters identified, and investigations documented. |
Internal and external reconciliations are different
An internal client money reconciliation compares the firm’s record of its client money against what it should hold in client bank accounts or client transaction accounts. In the normal approach, this comparison tests whether the segregated amount matches the requirements of the firm in relation to its clients. Subject to the applicable exceptions, firms are required to carry out an internal client money reconciliation each business day based on records available at the end of the business day before. This should involve the calculations being made using the firm’s internal records and ledgers, not bank statements and other third-party records.
An external reconciliation serves a completely different purpose. It entails analysing and comparing the firm’s records to those of banks and other third parties regarding the client funds. An external client money reconciliation checks the firm’s internal records against records provided by banks and other third parties holding client money. For an operating firm before a primary pooling event, it must be performed as regularly as necessary, without allowing more than one month between reconciliations, and as soon as reasonably practicable after the date to which it relates. The frequency must reflect transaction volumes, values and risks. FCA guidance states that, in most circumstances, firms undertaking transactions daily should perform an external client money reconciliation each business day.
The management may ask: “Is the calculation easy enough for someone unfamiliar with the spreadsheet to reproduce and understand?”
Investigate discrepancies, not just the final balance
When there is a difference found from an internal reconciliation, it is necessary to find out the reason behind it. In general, it is necessary to put the deficit into the client’s bank account and withdraw the excess by the end of the day. There are specific exceptions to the rules for firms that are no longer operating and are legally restricted.
Where an external client money reconciliation identifies a discrepancy, the firm must investigate it and take all reasonable steps to resolve it without undue delay, unless it arises solely from timing differences between the accounting systems. If the discrepancy cannot be resolved immediately and one record or set of records indicates that a greater amount of client money should be held, the firm must assume that record is accurate until the matter is resolved and pay its own money into the relevant account.
For practical purposes in controlling an error,
- The amount, date of identification and accounts involved;
- Reason for the error and the impact it may have on customers;
- Funding provided or actions undertaken;
- Who was at fault and that the matter is now resolved.
There should be a correction to the internal control weakness involved; otherwise the problem can recur.
Do not overlook mixed receipts and bank interest
A mixed remittance contains both client money and money belonging to the firm. Under the normal approach, the firm must take the necessary steps to ensure it is paid directly into a client bank account. The non-client-money portion must then be paid out promptly and no later than one business day after the payment into the client bank account has cleared, subject to the exception in CASS 7.13.72R(1)(a).
The rule also covers the receipt of bank interest in the client bank accounts, where the bank interest totally goes to the firm. The firms have to ensure, through a written request from the bank, that bank interest should be paid into a different account in case the firm anticipates it. Otherwise, bank interest should be removed from the client bank account promptly and, at the latest, within one business day after its receipt.
It is necessary to evaluate the bank account and payment instructions along with reconciliation amounts.
Prepare evidence throughout the audit period
The audit evidence pack for CASS should contain the following:
- Listings of client bank accounts and the relevant acknowledgement letters;
- Receipt routing process and sample client money transactions;
- Internal and external reconciliations, along with relevant supporting documents;
- Inquiry into discrepancies and evidence of rectification transfers;
- Relevant policies, bank due diligence records and reviews; and
- Registers of breaches, remediation actions and notification assessments.
- These documents can assist in providing evidence of compliance with the segregation, reconciliation and record-keeping requirements of CASS 7.
Don’t wait till the audit to consider notification requirements. According to CASS 7.15.33R, the firm must notify the FCA in writing without delay in certain situations. These situations include inaccurate or out-of-date client money records, inability or failure to complete the necessary internal or external reconciliation, and inability to fund shortfalls or withdraw excess amounts after reconciliations.
Discuss your CASS audit requirements with Reflex Accounting
An organised year-end file cannot substitute for good controls throughout the period of reporting. As per SUP 3.10, audits must distinguish specific CASS rule violations in a distinct breaches schedule as part of the client assets report. Comments regarding actions taken and mitigating factors should also be included by the firm.
In case your investment firm has client money, is close to its reporting date or is considering changing auditors, please feel free to contact Reflex Accounting about your CASS audit requirements. Please provide information on your FCA permissions, client money arrangements, reporting period and past audit results for your consideration.
