Statutory Instrument, 2012/65, (the ‘Instrument’) was issued by the FSA on 31 October 2012. This instruments sets out changes to CASS Firm classification, the operational oversight requirements, the CMAR Guidance Notes and the Mandate Rules.
Below are the detailed changes that are contained within this Instrument.
(a) CASS Firm classification and operational oversight requirements
The Instrument contains:
- clarification that the Regulated Activity of Arranging the Safeguarding and Administration of Assets does not fall within the scope of CASS 1A;
- clarification of the date when a Firm becomes a CASS Firm for the first time or when a CASS Firm changes category. The effective date will depend on the timing and circumstances of Firms’ notification of their CASS Firm type (i.e. Small, Medium or Large), which is based on their previous or projected client money and assets holdings; and
- when becoming a CASS Medium or Large Firm, the Firm must take the necessary steps to meet the CASS Operational Oversight Controlled Function (CF10a) requirements as soon as practicable, including submitting a CF10a Form A application within 30 business days.
(b) Client Money and Asset Return (CMAR)
The significant changes to the CMAR and the Guidance Notes are:
- a Firm should report its Client Money Requirement/Resources on the basis of the Client Money Requirement/Resource from its own accounting records (and not from statements from third parties), that are used in the internal reconciliation that the Firm carried out on the first Business Day following the Reporting Period in question;
- to clarify what should be included in the balance reported for the Client Money Requirement;
- Sections 5 and 7 – the number of un-reconciled Client Money/Safe Custody items refers to the number of individual discrepancies or breaks identified as part of a Firm’s internal/external reconciliation which have remained unresolved for a period of six Calendar Days or more/the relevant time band. Unresolved differences include items not yet allocated to an individual client and unidentified client money balances, but do not include items that are reconciled taking into account timing differences. Previously, many Firms have taken the view that if they know what a discrepancy or break is then it is not un-reconciled;
- Section 6 – requires a Firm to report each grouping of safe custody assets in a separate row of the table, which can result in the same line of stock being reported in more than one row. This duplication is to be removed by replacing Data Element 25A with two new Data Elements – “Where Held” and “How Registered”;
- Section 8 – requires a Firm to indicate whether it has failed to comply with any of the requirements of the CASS rules, as opposed to, previously, in a material respect.
The FSA has confirmed that the sole requirement of the Mandate Rules is that a Firm has established and maintained adequate records and internal controls in respect of its use of a ‘mandate’.
A ‘mandate’ is defined as any means that give a Firm the ability (without the client’s further involvement being necessary) to control a client’s assets or liabilities by:
- giving instructions in relation to the client’s money/assets to another person who is responsible for holding that money/assets; and
- giving instructions to another person so that the client incurs a debt or other liability to that other person (or any other person that is not the Firm itself).
The mandate rules apply to those Firms that control, rather than hold, clients’ assets or are able to create liabilities in the name of a client and they do not apply to a Firm:
- in relation to client money that the Firm is holding in accordance with CASS 5 or CASS 7;
- in relation to safe custody assets that the Firm is holding, safeguarding and administrating assets (without arranging) in accordance with CASS 6; or
- in relation to activities carried on in connection with the Firm’s role as operator of a regulated collective investment scheme.
The requirements of the Mandate rules do not apply in respect of criteria (for example, investment restrictions or exposure limits for a managed portfolio, and required/preferred executed prices/venues) that relate to the nature and circumstances of transactions effected by a Firm with or for a client.
With respect to Firm CASS classification, Oversight and the Mandate Rules, the Instrument’s provisions come into force on 1 January 2013.
In relation to CMAR, the Instrument’s provisions come into force on 28 February 2013.
Who will this impact?
These new Rules will impact (a) Firms that carry on investment and insurance intermediation business; (b) Firms that hold client money and custody assets, and/or have mandates by which they control clients’ assets or liabilities; and (c) individuals who have senior management responsibilities in relation to client money and custody assets operations.
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