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19th October 2016

Fine for Client Money Breaches

FCA dishes £8.2Million CASS fine to Aviva in the first fine related to the oversight failures of outsourcing arrangements.

The FCA has recently fined two Aviva firms £8.2M for a number of failings related to the protection of client assets.

Whilst no actual loss of client money or assets occurred, Aviva Pension Trustees UK Limited and Aviva Wrap UK Limited have both received regulatory fines for failings related to the oversight of outsourced providers and the protection of client assets. The FCA noted that they had breached Principles 3 and 10, as well as rules relating to client money (CASS), supervision (SUP) and systems and controls (SYSC).

In addition, the regulator also found deficiencies with Aviva’s internal reconciliation process with resulted in under and over segregation of client money. During a 12 month period from February 2014 to February 2015 apparently under-segregation of client assets peaked at £74.4 Million.

CASS Failings

As the FCA noted in its Press Release on the fine “The Client Assets Sourcebook (CASS) rules are there to protect client money and custody assets if a firm becomes insolvent and to ensure money and assets can be returned to clients as quickly as possible.”

However, “Aviva outsourced the administration of client money and external reconciliations in relation to custody assets, but failed to ensure that it had adequate controls and oversight arrangements to effectively control these outsourced activities.”

What to learn from Aviva’s Client Money Fine?

Mark Steward, Director of Enforcement and Market Oversight at the FCA informed that Aviva’s “is the first CASS case in relation to oversight failures of outsourcing arrangements”. He continued to state that the FCA “will continue to take action against firms that fall short of our CASS Rules.”

Therefore, it is recommended that those firms that have similar outsourcing arrangements take Aviva’s fine as a warning, particularly in light of Mr Steward’s comments:

“There is no excuse for not having robust controls and oversight systems in place to ensure their processes comply with the rules when CASS functions are outsourced.”

Client Money Outsourcing Arrangements: What to check?

From Aviva’s final notice, there are a number of pointers the FCA provide for firms with outsourcing arrangements to use to review their own arrangements for CASS compliance. A brief summary of some of these being:

Firms should place appropriate controls on their third party outsourcing providers;
Firms should sufficiently challenge the controls, competence and resources of outsourcing providers;
Firms should adopt a sensible approach to governance and ensure that useful management and monitoring information is generated in addition to undertaking audits and spot checks and keeping suitable and accurate records.
Firms should ensure staff have adequate knowledge and expertise for their job roles.
Firms should embed a proper reconciliation process within their systems and controls to ensure that the mis-segregation of client assets does not occur;
Firms should ensure that there is adequate technical expertise and resources dedicated to implement effective CASS oversight arrangements, able to ensure the prompt detection and rectification of any CASS Risk or shortfall in CASS compliance.

Given the FCA’s recent focus upon enhancing the Client Money Rules and a number of previous CASS enforcement actions, the regulator applied a 10% uplift to Aviva’s fine, which had an early settlement not been agreed, would have reached nearer £11.8M.

Click here to read Aviva’s Final Notice.

Client Money Support Services

Compound Growth can assist firms of all sizes to ensure they have the necessary procedures in place to remain compliant with the regulator’s rules pertaining to client money and client assets as set out in the CASS Sourcebook.

If you would like to discuss client money or client assets further, please feel free to contact us or email enquiries@compoundgrowth.co.uk.