CASS 12 – Client Assets: Client Asset Financial Instruments Default Rules – Client Protection on Firm Default
1. Chapter Summary
CASS 12 sets out the rules that firms must follow regarding client financial instruments in the event of the firm’s default. The chapter is critical for ensuring that client assets are protected and can be returned to clients promptly and fairly if a firm becomes insolvent or ceases trading. It establishes processes for asset reconciliation, identification, and prioritization of client claims in insolvency situations, providing confidence in the client asset protection framework under FCA regulation.
2. Applicability
This chapter applies to all FCA-authorized firms that hold or control client financial instruments and are subject to client asset safeguarding rules. It particularly focuses on the treatment of client assets when the firm faces insolvency or default scenarios. It applies regardless of client type (retail or professional) and across all relevant jurisdictions where the firm operates.
3. Key Rules and Their Meaning
- CASS 12.1.1R – Identification of client financial instruments in default Firms must ensure that client financial instruments can be clearly identified and segregated from the firm’s own assets during a default. In practice: This ensures client assets are not included in the firm’s insolvent estate and are available for return to clients.
- CASS 12.2.1R – Return of client financial instruments upon default The firm (or the appointed insolvency practitioner) must return client financial instruments promptly and in accordance with client entitlements. Regulatory intent: To minimize client losses and delays in accessing their assets during insolvency.
- CASS 12.3.1R – Client reconciliation and verification requirements Firms must perform thorough reconciliations and verifications of client holdings to enable accurate distribution of financial instruments in default scenarios. Nuance: Emphasizes accuracy and completeness to prevent disputes and loss.
- CASS 12.4.1R – Distribution priority rules Client claims for financial instruments must be prioritized over the claims of the firm’s creditors. Explanation: Protects client ownership rights by legally separating client assets from the firm’s liabilities.
4. Interpretation Notes / FCA Expectations
- The FCA expects firms to have detailed and tested procedures for handling client financial instruments in default events, including clear communication with insolvency practitioners.
- Firms should have controls to ensure client asset records are maintained accurately to facilitate smooth client asset return in default.
- FCA guidance underlines the importance of segregation and the legal protection afforded to client financial instruments.
5. Practical Considerations for Firms
- Develop and document robust default management policies, including processes for swift identification and return of client financial instruments.
- Maintain clear, detailed, and up-to-date records of all client holdings to assist in default reconciliation.
- Establish liaison protocols with insolvency practitioners to support the client asset return process.
- Regularly test default procedures via scenario planning or mock defaults.
6. Related Handbook References
- CASS 11 – Client financial instrument safeguarding rules (general holding and segregation)
- CASS 7, 10 – Client money rules and default management for cash assets
- SYSC – Systems and controls for client asset protection
- PRIN – FCA Principles for Business relating to client asset protection and fair treatment
7. Regulatory Focus / Enforcement Risk
- FCA enforcement focuses heavily on failures in safeguarding client assets during firm default, especially poor recordkeeping or delayed asset return.
- Firms with inadequate default procedures or evidence of client asset loss face high regulatory risk.
- FCA expects firms to prioritize client asset segregation and recovery as part of default planning.