The collapse of Lehman Brothers in 2008 was the catalyst for a global financial crisis that permanently altered the way in which compliance is carried out and understood. One key alteration was a new emphasis on firms protecting client money and assets.

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In today’s financial landscape, protecting client money and assets is a fundamental requirement of an effective compliance program. If a firm fails—whether it be a bank, e-money issuer, payment provider, insurer, or asset manager—customers need to know their money is safe and can easily be repaid without any issues. There is an expectation clients’ assets will be returned without delay or the need for insolvency practitioners or legal intervention.

Financial services providers in the United Kingdom that hold or control clients’ monies or assets are required to follow the rules outlined by the Financial Conduct Authority’s (FCA) “Client Assets Sourcebook” (CASS).

What is CASS?

The CASS rules were created to ensure client assets are safeguarded in the event of a worst-case scenario of a firm becoming insolvent. The rules were established in line with the FCA’s Principle 10, which states a firm “must arrange adequate protection for clients’ assets when it is responsible for them.”

The CASS rules, which can be found in the FCA handbook, include general provisions and how to apply them depending on the nature and size of the business. They detail how to segregate client money from company money and the correct recordkeeping requirements, among many other requisites. The rules also classify firms depending on the amount of client money in their possession.

Under the CASS rules, firms are separated into three different classification types:

  • Large firm: If the highest total amount of client money a firm held in the last calendar year is more than £1 billion.
  • Medium firm: If the highest total amount of client money a firm held in the last calendar year is an amount equal to or greater than £1 million and less than or equal to £1 billion.
  • Small firm: If the highest total amount of client money the firm held in the last calendar year is less than £1 million.

Why protect clients’ money?

There are many benefits associated with safely and correctly protecting clients’ money.

First, clients will trust the firm if they know their assets are safe, being segregated appropriately from company funds, and will be returned if anything were to happen to the company. This can lead to an improvement in reputation and result in more customers looking to come on board.

Second, by protecting clients’ money correctly and in accordance with the designated rules, firms keep regulators happy and off their backs. This negates any risk of a firm receiving regulatory actions such as warnings or fines.

Finally, stakeholders within the firm can operate with confidence knowing the rules are being adhered to. This is beneficial for the whole firm, with employees more satisfied working for a company doing the right thing, senior leadership instilling confidence across the business, and investors knowing they are investing in a firm that has their clients’ assets adequately protected.

Failing to protect clients’ money

If client money is not protected, either through the comingling of client and company assets, not returning client money, or losing it in legal complexities, firms can suffer serious consequences.

Regulators can and will impose high fines for failing to comply with the rules. A unit of JPMorgan Chase, for instance, was fined more than £33 million (then-U.S. $47 million) in May 2010 for its failure to segregate client money. Fines of such magnitude can obviously have a serious impact on a firm’s liquidity.

A failure to comply can also lead to a lack of trust. This can have a profound impact on a firm’s reputation, which in turn can result in customers going elsewhere, loss of revenue, disgruntled shareholders, negative media, and employees moving to competitors.

A bad reputation can be critical, and its impact can be difficult to reverse or halt. If a firm cannot improve its poor reputation, it can, in extremis, lead to it eventually going out of existence.

As the Lehman Brothers bankruptcy revealed, whole markets can be impacted by the actions of a single firm. A repeat of the global financial crisis of 2008 would be disastrous. It is, however, avoidable if firms follow the rules put in place by regulators. Any failure to comply could see history repeat itself in ways unwelcome to the firm, its employees, and wider society.

The International Compliance Association is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.

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