CASS 7 – Record Keeping and Reconciliation
1. Chapter Summary
CASS 7 sets out the rules firms must follow to maintain accurate records and conduct regular reconciliations of client assets, ensuring their protection and correct segregation. The chapter aims to prevent misappropriation or loss by requiring firms to keep up-to-date and reliable data on client holdings and to promptly identify and resolve discrepancies. Accurate record keeping and reconciliation are fundamental controls in safeguarding client assets and maintaining market integrity.
2. Applicability
This chapter applies to all firms that hold or control client assets under FCA regulation, including investment firms and custodians dealing with client money and custody assets. It covers both retail and professional clients unless specifically exempted or addressed under other rules. Firms that do not hold client assets typically are not subject to this chapter.
3. Key Rules and Their Meaning
- CASS 7.1.1R – Requirement to maintain records of client assets Firms must maintain records that enable them to distinguish client assets from firm assets and to identify client holdings accurately. In practice: Firms need systems to track client assets individually or collectively, ensuring clarity on ownership and asset location.
- CASS 7.2.1R – Reconciliation frequency and process Firms must perform timely reconciliations between their client asset records and the records of third parties (e.g., custodians or depositaries). Meaning: Regular reconciliation helps detect errors or losses early and is generally expected to be performed daily or at least frequently enough to minimize risk.
- CASS 7.3.1R – Correcting discrepancies When reconciliation reveals discrepancies, firms must promptly investigate and correct any identified issues. Nuance: Firms are expected to have clear escalation procedures for unresolved or serious discrepancies.
- CASS 7.4.1R – Record retention Firms must retain client asset records and reconciliation documentation for a specified period (usually 5 years). Implication: This ensures availability of evidence for audits, investigations, or client queries.
4. Interpretation Notes / FCA Expectations
- The FCA expects firms to implement robust IT systems and controls to maintain accurate, real-time data on client assets.
- FCA guidance stresses that reconciliation is a critical control and should be prioritized, especially in high-volume or complex custody arrangements.
- Firms are encouraged to document reconciliation policies thoroughly and ensure staff are trained to recognize and handle issues promptly.
5. Practical Considerations for Firms
- Implement automated systems capable of segregating and tracking client assets clearly.
- Develop written policies outlining reconciliation frequency, methods, and responsibilities.
- Conduct reconciliations with counterparties regularly and maintain detailed records of results and follow-up actions.
- Train staff on reconciliation procedures and issue escalation.
- Retain reconciliation reports, correspondence, and investigation logs securely for compliance and audit purposes.
6. Related Handbook References
- CASS 3 – Custody and control of client assets (general safeguarding principles)
- CASS 6 – Client money safeguarding (specific to cash assets)
- SYSC 10 – Systems and controls (broader risk and operational management framework)
- PRIN 2A – FCA Principles for Business (integrity and skill, care and diligence)
7. Regulatory Focus / Enforcement Risk
- The FCA closely monitors reconciliation practices as failures in this area can lead to client asset losses and systemic risk.
- Firms with weak or infrequent reconciliation processes have been subject to enforcement action.
- Clear audit trails and rapid response to discrepancies reduce enforcement risk.
- Special scrutiny is placed on firms with complex custody chains or multiple third-party providers.