Client Assets And Client Money Rules Flashcards
Fiduciary duty
Briefly explained the concept of fiduciary duty on what it means
Definition: Fiduciary duty means a legal and ethical responsibility to act in someone else’s best interest.
E.g. An investment manager has a fiduciary duty to act in the best interests of their clients.
- Trust and Confidence:
A. A client places trust in a fiduciary (e.g., an investment manager, lawyer, or trustee) to make decisions on their behalf.
B. The client relies on the fiduciary’s expertise and expects them to act honestly and responsibly.
2 Acceptance of Responsibility:
A. The fiduciary accepts this trust and agrees to act in the client’s best interest using their knowledge and discretion.
- Legal Obligation to Act in the Client’s Interest:
A. The fiduciary cannot do anything that harms the client’s interests.
B. They cannot act for their own benefit at the client’s expense. - Duty of Skill, Care, and Diligence:
A. The fiduciary must use all their skills, experience, and effort to protect and advance the client’s interests.
The FCA’s Client Assets Sourcebook (CASS) contains rules for firms that hold client assets and money, ensuring protection and proper handling.
What are the two CASS rules that are related to this?
- CASS 6 – Client Assets Custody Rules
A. CASS 6 applies when a firm holds or controls client assets.
B. This is for investments e.g. shares, bonds, or other investments) on behalf of clients.
- CASS 7 – Client Money Rules
A. CASS 7 applies when a firm holds or controls money belonging to clients.
B. This is for cash/ money e.g., deposits, funds for trading, or money in investment accounts.
- A firm is required to determine, and notify the FCA, once a year on what type of CASS classification the firm falls into.
What are the three types of CASS classifications?
This is for the highest amount of client money or client assets held over the last year or projected to hold over the next year.
- Large CASS Firm:
A. Client money: Holds £1 billion or more
B. Client assets: Holds £100 billion or more - Medium CASS Firm
A. Client money: Holds >= £1 million but <= 1 billion.
B. Client assets: Holds >=£10 million but <= £100 billion. - Small CASS Firm
A. Client money: Holds less than £1 million.
B. Client assets: Holds less than £10 million
With regards to CASS large, medium and small firms - what should be done to achieve compliance with CASS obligations?
- A CASS medium or large firm must assign one director or senior manager to oversee and make sure the company’s systems and controls are working effectively to follow the rules of CASS (Client Assets Sourcebook, which relates to protecting client money).
- A CASS small firm must assign a director or senior manager to be responsible for ensuring the company follows the CASS rules, but they don’t have to be in charge of overseeing systems or controls.
Custody of clients’ assets
This touches CASS 6 (Client Assets custody rule).
What does this rule mean?
- Requires a firm to arrange adequate protection for assets for which is responsible for all its clients.
- These rules are designed primarily to restrict the co-mingling of client and firm assets. (E.g. During insolvency.)
- Also minimise the risk of a client’s assets being used without their consent or against their wish
- The firm must properly register or record the ownership of a client’s assets - either in the client’s own name or in the name of a trusted nominee company that represents the client
Note: If the investment is governed by laws/ market practices outside the UK, it may be acceptable to register the assets in the name of the custodian (the firm holding the assets) or the firm itself.
Depositing assets with third parties
There are four main concepts around this? What is the first concept?
Part 1
- Conditions for Depositing Assets with a Third Party:
A. A firm can deposit safe custody assets (client assets) with a third party only if:
I. It chooses, appoints, and reviews the third party with skill, care, and diligence.
II. It regularly checks the arrangements for holding and safekeeping the client assets.
Depositing assets with third parties
There are four main concepts around this? What is the second concept?
Part 2
- Keeping Client Assets Separate
A. The firm must ensure that client assets held by a third party are kept separate from:
I. The firm’s own financial instruments.
II. The third party’s financial instruments.
Depositing assets with third parties
There are four main concepts around this? What is the third concept?
Part 3
- Selecting and Reviewing a Third Party
A.. When choosing, appointing, or reviewing a third party, the firm must consider:
I. The expertise and market reputation of the third party.
II. Any legal or market practices that might affect client rights.
Depositing assets with third parties
There are four main concepts around this? What is the fourth concept?
Part 4
- Keeping Records and Written Agreements
A. The firm must record the reasons for selecting a third party and review them periodically.
B. This record must be kept for five years after the firm stops using that third party.
C. There must be a written agreement between the firm and the third party that:
I. Clearly sets out the binding terms of the arrangement between the firm and the third party
II. Stays valid for the entire duration of the arrangement.
III. Specifies the custody services that the third party is responsible for/ should provide
Use of clients’ assets
What are the two exceptions for a firm entering into arrangements for securities-financing transactions (using a client’s assets)?
- The client has given prior consent:
A. The firm can only use the client’s financial instruments if the client has agreed to it in advance and specified the terms under which this can happen. - The use is restricted to specified terms: The firm must ensure that the client’s financial instruments are only used according to the specific terms that the client has consented to.
Reconciliation of clients’ assets
Briefly explain what this means and what are the two methods that can be performed for internal custody record checks?
- All firms need to regularly check their records to make sure that the client assets they hold are accurately accounted for. These checks should be done at least once a month.
- The firm can perform these checks in two ways:
A. Internal system evaluation method:
B. Internal custody reconciliation method:
Reconciliation of clients’ assets -
Method 1: Internal custody reconciliation method.
Explain what this is.
- Involves comparing the firm’s own records with other external records to make sure everything matches up.
- The firm compares two sets of records on a specific date to check if they match.
- These two records don’t have to be completely independent of each other, but they should both show the same information about the client assets the firm is holding.
- Goal - make sure that the firm’s records of the assets it holds match the obligations it has to clients, confirming that it is correctly managing and safeguarding those assets.
Reconciliation of clients’ assets -
Method 2: Internal system evaluation method
Explain what this is.
- Involves reviewing the firm’s own systems to make sure the records are correct.
- Evaluate the completeness and accuracy of the firm’s internal records, and accounts of custody assets held for the clients
- Evaluate whether the firm’s systems and controls correctly identify and resolve all discrepancies in its internal records and in the accounts of assets it holds for clients
- All firms holding client assets must:
A. Compare internal records with the actual physical assets to maintain accuracy
B. Do this at least every six months. - There are two methods to compare a firm’s and internal records and account of actual physical assets held for the client
A. Total count method.
B. Rolling stock method.
Reconciliation of clients’ assets -
Method 2: Internal system evaluation method
There are two methods that allows the firm to compare the internal records and account of the actual physical custody assets it holds for its clients .
Explain what these two methods are
- Total count method
Count of all physical custody assets held by the firm on a particular date - Rolling stock method
Count of all physical custody assets held by the firm being undertaken in more than one stage, with each stage referring to account of a line of stock or group of stock lines
Assets are verified over time. Allow for continuous monitoring of assets. - The chosen reconciliation method must be reviewed periodically to ensure it remains appropriate and effective.
- This review is a requirement of the annual auditor’s client assets report, which assesses the firm’s compliance with asset custody and reconciliation standards
Reconciliation of externally held assets
Briefly explain what this means and what are the requirements?
Definition: External custody reconciliations are required when a firm deposits client assets with third parties.
Requirements are:
1. Must be performed at least monthly or more frequently if necessary.
- Involves comparing the firm’s internal records with records from the third party holding the assets
A. Reconciliation helps detect discrepancies - Third-party records can include statements or confirmations as appropriate.
- The third party’s records used for reconciliation can include:
A. Statements issued by the custodian showing asset balances.
B. Confirmations received from the third party verifying asset holdings.
C. Electronic records from regulated financial institutions. - Physical custody assets (e.g., paper share certificates) DO NOT require external reconciliations.
A. However, firms must conduct periodic “spot checks” to ensure proper registration of these assets under the CASS rules.
B. Ensure the title or registration of these assets is correctly recorded.
Define reconciliation
Definition:
Reconciliation is the process of comparing two sets of records to ensure accuracy and consistency.
Purpose:
1. Ensures accuracy in financial reporting and record-keeping.
2. Detects and corrects errors, omissions, or mismatches in records.
3. Helps maintain compliance with regulatory requirements (e.g., CASS rules for client assets).
Types of reconciliation:
1. Internal Reconciliation –
Verifying records within the firm’s own systems.
2. External Reconciliation –
Comparing internal records with third-party custodians or counterparties.
3 Physical Reconciliation –
Checking physical documents (e.g. share certificates) through spot checks.
What are the steps a firm needs to take when a reconciliation highlights a short fall in the safe custody assets held by the firm due to discrepancies?
I.e. how should it handle short falls?
- Immediate Resolution Required -
The firm must resolve the issue immediately if possible - If the shortfall cannot be resolved right away, the firm must:
A. Segregate an equivalent amount of its own assets or client money.
B. Ensure these segregated funds can be realised for clients’ benefit if the firm fails. - Third party reasons:
If the shortfall is due to:
A. A third party (e.g., custodian error), or
B. Timing differences between the firm’s and third party’s accounting systems,
C. The firm is not required to cover the shortfall but may choose to do so. - Resolution & Client Notification
A. The firm must work to resolve shortfalls as soon as possible.
B. If a third party informs the firm of the loss of a custody asset, the firm may need to inform affected clients.
Client money rules
What does client money rules mean? And when does it apply?
- Application:
These rules apply to firms that receive or hold client money in the course of:
A. MiFID business (Markets in Financial Instruments Directive).
B. Designated investment business (regulated investment services). - Purpose:
A. To protect client money in case the firm becomes insolvent.
B. It’s done by ensuring the client’s money is kept separate from the firm’s own money.
Client money rules
When do the rules NOT APPLY? I.e. When is Money NOT Considered Client Money?
If a client transfers full ownership of money to a firm to:
A. Secure, cover, or fulfill obligations (actual, contingent, or future).
B. In this case, the money no longer qualifies as client money under the rules.
Client money rules
Where should the client money be held as soon as the firm receives it?
- A firm must promptly place client money into:
A. A central bank.
B. A BCD credit institution (a bank in an EEA country regulated under the Banking Consolidation Directive).
C. A third-country bank/ bank authorised in a third country (a non-EEA bank).
D. A qualifying money market fund.
- These accounts are called “client bank accounts.”
- Segregation of client money -
A. Client bank accounts should be separate from any account used to hold money that belongs to the firm.
B. Client bank accounts should be clearly identify as holding client money.
Client money rules
What are the concepts around selecting and reviewing the institutions that is being used to hold a client money?
Firms must:
A. Carefully select the institution where client money is held.
B. Periodically review the selection.
C. Keep records of their reasons for using the institution for five years after stopping its use.
Client money rules
What is a normal approach for receiving client money?
- All client money must be received directly into a client bank account.
- It must NOT pass through the firm’s own accounts.
- Clients and third parties should transfer client money directly into the firm’s client bank accounts.
Client money rules
What is an alternative approach for receiving client money?
- For the alternative approach, firms must:
A. Obtain written confirmation from their auditor to the FCA.
B. Prove they have adequate systems and controls in place. - This approach allows firms to:
A. Receive client money into the firm’s own accounts before moving it to client bank accounts.
B. Appropriate for a firm that operates in a multi-product, multi-currency environments. - Firms using the alternative approach must:
A. Have systems to monitor client money flows.
B. Ensure they can reconcile records and accounts properly.
Client money rules
For firms that are using the alternative approach - what are the guidelines around reviewing this approach?
- A firm must:
A. Document its reasons for using the alternative approach.
B. Review these reasons annually for each business line.
C. Assess if the approach still meets client protection requirements. - If a firm determines that the alternative approach is no longer appropriate, it must:
A. Stop using it within six months.
B. The FCA generally does not expect smaller firms to use the alternative approach.
Client money rules
What are the three types of client bank accounts a firm can open to hold money for the client?
- General Client Bank Account –
Holds money for multiple clients. - Designated Client Bank Account –
A. Must include the word “designated” in its title.
B. In case of bank failure, funds in this account should not pooled with other accounts unless the firm itself fails. - Designated Client Fund Account –
A. Similar to a designated client bank account but specific to a particular fund.
Note: All client bank accounts must be separate from the firm’s own accounts.
Client money rules
Define what prudent over-segregation means?
- Firms may transfer their own funds into a client bank account to prevent shortfalls.
A. Shortfall is when the actual amount of client assets or money held by a firm is less than the amount that should be held - These funds then become client money and are called “prudent over-segregation.”
- Firms must have a written policy explaining:
A. Why prudent over-segregation is necessary.
B. How the amount to be segregated is calculated. - A firm must maintain a prudent segregation record, tracking:
A. Deposits made into the client account.
B. Withdrawals when they are no longer needed.
Client money rules
What are the record-keeping requirements for client money?
Firms must maintain accurate records to:
A. Distinguish between client assets, money from different clients, and the firm’s own money.
B. Ensure compliance with client asset protection rules.
C. Records must be retained for five years.
