In this blog, our Product Manager & CASS expert Murray Campbell explains how the FCA monitors CASS compliance – and what happens when firms get it wrong.
CASS compliance continues to be crucial for regulated firms. The FCA relies heavily on firms adhering to the rules to help them achieve their primary objectives.
One of the FCA’s key focus areas is to reduce and prevent serious harm. A key aspect of this is reducing the harm caused by firms failing. This, of course, is underpinned by CASS 6 for custody assets and CASS 7 for client money.
Compliance with CASS should enable firms to swiftly return client money and custody assets to consumers in the event of failure. Therefore, CASS remains a central focus of the FCA.
But what happens when the FCA is concerned about a firm not meeting its CASS requirements?
In this blog, we break down:
- How the FCA monitors compliance with CASS rules
- What a section 116 skilled persons review is
- The key challenges a section 116 review presents
- How to avoid one
How does the FCA monitor compliance?
The FCA has a range of tools at its disposal to monitor firm compliance. It focuses a lot of its work on data collection and analysis – and CASS compliance is no different.
Firms provide the FCA with a wealth of data via CMAR on a monthly basis. In addition to annual CASS audit reports, this information provides the FCA with vital awareness of whether firms are compliant.
The FCA will use this data – alongside its own investigative work, breach reporting, complaints data and media coverage – to assess where concerns and risks may exist.
One of the supervisory tools available to the FCA is the appointment of an independent third party to carry out a firm review. The ‘skilled person’ can be asked to carry out a section 166 review, to assess and report on the extent of the risks identified at the firm.
This can be a costly and resource-intensive exercise for a firm to support.
What is a section 116 skilled person review?
The FCA’s supervision handbook provides details on the scope and the process for appointing a skilled person (SUP 5).
The FCA can use a skilled person review to assess any area of a firm’s regulated business. The regulator’s aims when appointing a skilled person to carry out a review could be:
- Diagnostic – to identify, monitor and assess risks
- Monitoring – to track the development of identified risks
- Preventative – to limit or reduce risks and prevent them from materialising
- Remedial – to respond to risks once they have materialised
When concerned with CASS risk, producing a section 166 report will require an extensive review of all aspects of the firm’s CASS business. The skilled person will require sufficient access to the firm’s data, processes and controls to enable them to report on the scope of issues identified by the FCA.
This places a significant burden on the firm to manage this requirement.
Our CASS compliance guidebook outlines the requirements for each area of the rulebook to help you navigate through it. You’ll also learn about the key challenges and how to stay compliant. Get your copy here.
What challenges does a section 116 skilled person review present?
When a skilled person review is imposed on a firm, it is safe to assume the firm will be under a lot of pressure. Supporting the completion of the review will only add to that.
The outcome of the review can be positive, with the firm receiving recommendations to move forward and improve its business.
However, the process of reaching that point will place significant demands on the firm, including a drain on resources and financial burden—the firm covers the costs of carrying out the review.
The impact on resources should not be underestimated either. The firm must be completely transparent and provide full access to documentation and personnel to help the skilled person understand the firm’s processes.
When a firm is subject to a skilled person review they face the risk of adverse publicity, the detrimental effect of which would add to the overall costs incurred.
Finally, the outcome of the review will also dictate any remediation required and what further regulatory action the firm may face, including a fine or a variation or ultimate cancellation of permissions.
How to avoid a section 116 review: invest in your CASS compliance
While a skilled person review can ultimately benefit a firm, the process’ challenges and costs mean it should be avoided.
CASS compliance must remain a top priority for firms. Cutting corners is not an option and the subsequent costs and impact of failed compliance threaten a firm’s viability. Investing in CASS compliance upfront is, therefore, a much better approach.
Weaknesses in your CASS environment can arise quickly and in many ways – key person dependency and an over-reliance on manual processes are just two examples.
So firms must invest appropriately in their systems, processes, controls and people to help maintain compliance.
With our automated CASS solution, you can meet requirements and increase control while spending 80% less time on manual data preparation tasks. Find out more about our solution for CASS 6 and CASS 7 here.