FCA BS - Client Assets and Client Money Rules Flashcards
Fiduciary Duty
Obligation to act in best interest of another party. The fiduciary must use all its skill and diligence when acting on behalf of client.
The existence of a business relationship does not result in a fiduciary obligation, rather when one party proposes and the other accepts a special trust in the professional expertise and discretion
Client Money and Custody Assets - Classification
FCA PfB 10 states ‘a firm must protect clients assets when responsible’. Client assets being Client Money (CASS 7) and Custody Assets (CASS 6)
The firm must notify the FCA once a year of its CASS classification:
small: CM < 1m and CA < 10m
medium: 1m < CM < 1bn and 10m < CA < 100bn
large: CM > 1bn and CA > 100bn
Medium or Large firms must allocate ‘operational oversight function’ (CF10a) to a director or senior manager
Custody of Client Assets - CASS and Purpose of rules
Client Assets custody rules (CASS 6) requires a firm to protect assets which it is responsible for its clients, largely to stop ‘co-mingling’ of firm and client assets
Depositing Assets with third Parties
Must use skill care diligence when when appointing third party and in periodically reviewing it
Must keep record of third party for 5 years from ceasing to hold assets
Must have written agreement from client
Banned Use of Client Assets
A firm must not enter into ‘securities-financing transactions’ (stock lending or repurchasing agreements) with client assets
unless given client consent
Reconciliation of Custody Assets - frequency
Firms must perform internal custody checks at least monthly, to ensure their records match clients safe custody assets.
Internal custody checks must be by one of two methods:
Two methods of internal custody checks
Internal Custody Reconciliation Method
- Comparison of two separately maintained records on a particular date. Firms record of SCA matches obligation to client
Internal System Evaluation Method
- A process to evaluate the completeness and accuracy of the firms internal records
Physical Asset Reconciliation Checks - frequency and methods
All firms holding ‘physical’ custody assets must perform checks at least every 6 months, with the method reviewed afterwards by Auditors.
Total Count: count of all PCA held on particular date
Rolling Stock: count of all PCA undertaken in multiple stages
Reconciliation of External (third party held) Assets and Physical TPA
Must be checked at least monthly, comparing firms internal records with records of third party
Where third party firms hold physical custody record, such as paper share certificates, must carry out ‘periodic spot checks’
Highlighted Shortfalls or Discrepancies of assets
When a reconciliation has highlighted a discrepancy, the firm must resolve immediately
If unable to do so, it must ensure client protection by segregating an equivalent amount which can be realised for clients if the firm fails
If another party is responsible, the firm does not have to make good the deficit but should take the steps required to resolve
Client Money Rules
CASS 7 Protect client investors money in event of insolvency of investment firm, by keeping money separate
Where a client transfers full ownership of money to a firm It is no longer regarded as client money
Record of client money should be held for 5 years to distinguish between firm and client money
Client Money Rules - acceptable institutions
A firm receiving client money must place in a ‘client bank account’ and not received by the firms accounts, in either:
- central bank
- BCD credit institution
- bank authorised in third country
- qualifying money market fund
The institution must be chosen carefully and periodically reviewed, with records kept for 5 years after ceasing to use institution
Alternative Approach - client money
Must first send written confirmation to FCA from firms auditor of AA
Client money is paid into and out of firms own bank accounts (with systems in place monitoring flows to stop co-mingling)
Used for large, multi-product or multi-currency firms
Must document reasons for using approach, and review at least annually, if no longer appropriate must cease using alternative approach within 6 months
Client Bank Accounts
Must be opened in form of:
- General client bank account
- Designated client bank account
- Designated client Fund account
In a DCBA, in the event of failure of the bank, it is not pooled with any other type of account, unless the firm fails
Prudent Over-segregation
Firms transfer own money into client bank account to prevent a shortfall (becoming client money)
Firms have a policy of how to use this method and must contain a Prudent Segregation Record
