Regulation  

‘Cass Resolution Pack has no power over poor records’

Many things have come to light as a result of the collapse of Lehman Brothers. One thing abundantly clear is that the rules in force at the time did not fully contemplate the position of client assets in the event of insolvency.

The subsequent protracted litigation process has highlighted the practical challenges associated with the timely return of client assets.

In March 2012, the FSA issued a Policy Statement, PS12/6, which introduced a Cass Resolution Pack, aimed at ensuring a more orderly and efficient return of client assets. The Cass Resolution Pack forms part of a suite of measures which will ultimately result in a fundamental overhaul of the current Cass regime.

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All firms that hold safe custody assets or client money will be required to have a Cass Resolution Pack, which must be available within 48 hours of the appointment of an insolvency practitioner or at the FSA’s request.

Cass Resolution Pack contents

The documents that comprise the Cass Resolution Pack should be held in a master document identifying the following:

- The details of institutions with which the firm has deposited client money or safe custody assets

- The names of senior management and other individuals critical to the performance of client assets operational processes, including those with Cass oversight responsibilities

- Copies of executed agreements with the institutions holding client assets

- Records and accounts including the most recent internal and external reconciliations for client money and safe custody assets.

What will this mean in practise?

The first and most significant challenge facing firms is complying with the 48-hour time period. This must be done in and around the maelstrom associated with insolvency. This will impose significant pressure on the key Cass individuals, particularly as a practitioner will automatically take over the management of the firm’s affairs. As such, the usual systems to which individuals at the firm ordinarily have access may not be readily available upon insolvency.

Furthermore, firms will need to ensure continued systems access even after insolvency has been declared in order to pull together the information that forms the Cass Resolution Pack. This may pose a real challenge as many service agreements dictate that insolvency triggers termination provisions.

The rules require firms to ensure the ongoing accuracy of the Cass Resolution Pack. As external and internal reconciliations of client assets form part of the specified information, it appears the Cass Resolution Pack will need to be continually updated to reflect all reconciliations carried out.

Although a five-business day grace period for updating records has been incorporated into the rules, it is not unreasonable to conclude that the FSA expects the Cass Resolution Pack to be completely up-to-date, so adding to the regulatory burden on firms.

Where does all this leave us?

The fact the FSA recently issued another consultation paper, CP12/15, shows there are issues yet to be resolved. The question that remains is whether the Cass Resolution Pack offers any real progress in the right direction.

Having the information in a single location does not significantly hasten the pace at which assets are distributed. As Lehman Brothers has shown, the real causes of the hold up are poor records, inadequate systems and controls, errors in client asset segregation and the infinitely complex maze that often surrounds clients’ assets. Over this, the Cass Resolution Pack has no power.