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CASS 3 – Client Assets

PostedJune 23, 2025
UpdatedJune 23, 2025
ByAndy

1. Chapter Summary

CASS 3 sets out the rules on how firms must treat, safeguard, and manage client assets held in custody or control. It ensures that client assets are identifiable, properly segregated, and not used by the firm for its own business. This chapter is vital to protect clients from loss if a firm becomes insolvent or misuses assets and to maintain trust in financial markets.

2. Applicability

Applies to all FCA-regulated firms that have custody of, or hold control over, client assets under their regulatory permissions. This includes investment firms, custodians, asset managers, and platforms. It is relevant to both retail and professional clients. Certain assets may fall outside its scope (for example, when firms hold assets purely as intermediaries without control).

3. Key Rules and Their Meaning

  • CASS 3.1.1R – Application and Purpose* “This chapter applies when a client gives a firm rights over an asset and requires the firm to hold it for the client.” In practice: Firms must recognise when they are in control of client-held assets and apply appropriate custody safeguards.
  • CASS 3.2.1R – Separate Identification* Firms must ensure client assets are segregated and identifiable at all times from their own assets. Meaning: Assets held in custody must never be commingled with the firm’s own property.
  • CASS 3.3.1R – Custody Arrangements When delegating custody to third parties, firms must conduct due diligence, enter into appropriate agreements, and disclose this to clients. Nuance: Firms retain ultimate responsibility for the security of client assets, even when using external custodians.
  • CASS 3.4.1R – Record‑Keeping Firms must maintain accurate records of client asset holdings, instructions, and movements. Meaning: Enables tracing and reconstruction of client assets at all times, supporting client protection and audits.

4. Interpretation Notes / FCA Expectations

  • The FCA expects firms to treat client assets with a high standard of fiduciary care, not using them for any firm purpose.
  • Firms should review custodial arrangements regularly to ensure contractual protections and operational integrity.
  • Guidance underscores the importance of timely asset segregation and reconciliation to reduce risk.

5. Practical Considerations for Firms

  • Use clearly marked client asset accounts or custody sub-accounts in line with ownership.
  • Perform prudent due diligence on all custodians or sub-custodians and maintain written agreements specifying asset treatment.
  • Maintain client asset registers and logs capturing all asset inflows and outflows.
  • Conduct regular reconciliations between firm and custodian records, investigating discrepancies promptly.
  • Establish senior oversight and audit trails to support compliance and accountability.

6. Related Handbook References

  • CASS 1/CASS 1A – Scope and firm classification rules
  • CASS 6 – Client Money rules
  • CASS 7 – Client Money Handling detailed rules
  • SYSC 10 – Systems and Controls (governance over client asset rules)
  • PRIN 2A – FCA Principles (including integrity and client interests)

7. Regulatory Focus / Enforcement Risk

  • Mismanagement of client assets is a high enforcement priority for the FCA, especially where firms fail to segregate or reconcile assets.
  • Cases like Lehman Brothers emphasise strict segregation and trust protection for client assets.
  • Firms must avoid using client assets for firm benefit and ensure accurate record-keeping to prevent enforcement action.