CASS Resolution Packs - Proposed Documentation Requirements for Firms Holding Client Assets
Michael Beaton explains the ins and outs of the new CASS Resolution Packs that some firms will have to produce and maintain regularly to meet new FSA proposals regarding recovery and resolution plans for client money
In August 2011, the FSA published Consultation Paper CP11/16 on Recovery and Resolution Plans. CP11/16 includes a proposal that all firms holding safe custody assets and/or client money (“CMA”) in relation to investment business, but excluding those firms that only hold client money for insurance intermediation purposes under CASS 5, will be required to create and maintain a CASS Resolution Pack containing the information and documentation detailed below.
The requirement to produce a CASS Resolution Pack does not address ‘recovery’ considerations per se, nor does it attempt to improve the CMA segregation arrangements which apply to a firm’s clients. Rather, the purpose of the proposal is to reduce the wider economic cost of firm failure by promoting the swifter return of CMA to clients. This would be achieved by ensuring that information and records that would help an insolvency practitioner or resolution authority return CMA to clients more quickly would be more readily accessible to the insolvency practitioner after the firm’s failure.
Contents of a CASS Resolution Pack
The documentation to be provided as part of a CASS Resolution Pack is categorised into two sections, as detailed below. Note that the policy does not require physical duplication of existing records.
The documentation within this section constitutes new documents/information items which are not currently required by existing FSA Handbook rules. In general, these are either signposting documents, which will direct an insolvency practitioner to the location of the firm’s CMA information and records, or alternatively documents providing important firm-specific and CMA information that would be helpful to an insolvency practitioner. A full list of the section 1 documentation is provided in Annex 1 to this summary.
The documentation referred to in this section is already required by existing FSA Handbook rules. A full list of the section 2 documentation is provided in Part 2 of Annex 1 to this summary.
Each document required to be produced as part of a CASS Resolution Pack must be capable of being retrieved within 48 hours, irrespective of whether the firm is a going concern or has entered resolution.
Updating and Maintenance
Firms will be required to keep Section 1 items materially up-to-date. Any changes to Section 1 items must be reflected promptly, and in any event within 5 business days of the change. Section 2 items will be updated as per the existing FSA Handbook rules.
In line with the policy of increased oversight detailed under PS10/16, the individual with responsibility for CASS oversight of a firm will have responsibility for ensuring the firm’s compliance with the CASS Resolution Pack proposals. For CASS Large and CASS Medium firms, this will be the CF10a.
In addition, firms that are subject to the proposed CASS Resolution Pack rules, or that were subject to the rules in the previous year, must attest to the FSA, once every calendar year, that they were in compliance during the previous year, and that they are currently in compliance (if applicable). The individual with responsibility for CASS oversight will also be responsible for sending this attestation.
The estimated cost of producing a CASS Resolution Pack is likely to be significant, particularly for CASS Large firms. A summary of the cost benefit analysis performed by the FSA as part of CP11/16 is provided in Annex 2 to this summary.
The FSA is due to publish a policy statement with respect to CASS Resolution Pack rule in Q1 2012, with a view to the rules themselves coming into effect six months later.
The production and maintenance of CASS Resolution Packs will require firms to find significant additional resource at a time when they are already grappling with the consequences of the forthcoming legislation on Living Wills. In an environment of across the board headcount freezes, the cost, in terms of internal time and management oversight should not be underestimated. Nonetheless, certain aspects of CASS Resolution Pack creation and maintenance, like a Living Will, lends itself neatly to the application of technology and the outsourcing of document administration. It seems likely that this is the area where firms will find the greatest future cost savings and efficiencies.
Part 1 - Section 1 Documentation
1) A “Master Document” - which contains information enabling an insolvency practitioner to locate and retrieve the documents which the firm must include in its CASS Resolution Pack;
2) A document which identifies the firm’s management and, separately, a list of:
a. other individuals in the firm significantly involved in CMA processes (IT, back-office, operations etc); and
b. each individual within the firm who is able to modify the firm’s records of its holdings of CMA or to effect a transfer of CMA;
3) A corporate structure chart of the firm’s group which identifies each member of the firm’s group and any branch(es) of the firm or its group members. Any entities that are nominees used for client money and asset purposes by the firm should be marked as such;
4) Where applicable, a list of appointed representatives or other agents of the firm who receive/transmit client money and/or assets in their capacity as the firm’s agent;
5) A copy of the firm’s manual in which are recorded its procedures for the management, recording and transfer of the client money and safe custody assets that it holds;
6) Details of the accounts with third party institutions used by the firm to deposit or transfer client money and the contact details of those institutions;
7) If applicable, details of the accounts with third party institutions used by the firm to deposit safe custody assets and the contact details of those institutions;
8) Agreements the firm has with service providers – which may be third party administrators, outsourced parties and affiliated companies of the firm – in respect of the operations of the firm’s CMA business. This should include a document which describes the ways in which an insolvency practitioner can gain access to the information held by that third party and give instructions to that third party; and
9) Agreements with the institutions in items 6) and 7) above.
Part 2 - Section 2 Documentation
1) Records of client agreements, as required under COBS 8.1 (retail and professional client agreements) and CASS 6.5.2AR (agreements which grant a firm a right to us safe custody assets);
2) Records as required under CASS 6.3.1 R (4) and CASS 7.4.10R. These records relate the grounds upon which a firm satisfies itself as to the appropriateness of its selection of a third party to which the firm deposits CMA;
3) Records and accounts of the client money held for clients as required by CASS 7.6.1R and 7.6.2R (records necessary to distinguish client money between clients and from firm money);
4) Records and accounts of the safe custody assets held for clients as required by CASS 6.5.1R and 6.5.2R (records necessary to distinguish safe custody assets between clients and from firm money);
5) A record of clients’ MiFID client categorisation and copies of any agreements entered into with each client, as per COBS 3.8.2 R (2);
6) A record sufficient to show and explain the method of internal reconciliation of client money balances used by the firm as required by CASS 7.6.7; and
7) Records of the use of safe custody assets as required by CASS 6.4.3R.
Estimated Cost of Producing a CASS RP
Michael Beaton, managing director, Derivatives Risk Solutions LLP
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