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The Safeguarding Shift Part 2: CASS 15 Internal and External Reconciliations

The week before last we published our first blog outlining an overview of the Financial Conduct Authority’s (“FCA’s”) eagerly anticipated Consultation Paper (“CP”) on safeguarding. Impacted firms should prioritise their preparation for the proposed regulatory changes. This blog, the second in our series on the CP will deep-dive into the cornerstone of adequate protection of relevant funds: reconciliations.
 

RECONCILIATIONS
 

Timelines and key challenges

Most of the enhancements to reconciliation requirements in the CP will be included in the interim rules, which will be published in H1 2025 and become effective 6 months thereafter.

We expect the following three areas of the interim rules regarding reconciliations to pose significant challenge to the industry, and we recommend firms begin preparing themselves immediately. Boards will need to recognise the regulatory implications and make the requisite investment to back-end systems to meet the objectives of the rules. Firms will need to be compliant by the end of 2025 at the latest and we recommend prioritising the following 3 areas:

  • Ensuring completeness, accuracy and integrity of the firm’s own records forming required data points in the reconciliations. Many firms operate on single-entry systems and do not maintain their own independent cashbook records on a transaction by transaction basis each day causing existing safeguarding challenges. This will not suffice under the new rules. We saw many firms struggle with this when implementing the CASS 7 internal reconciliations. Safeguarding firms will not achieve adequate compliance with regulations if existing systems and sets of records are not fit for that purpose.
  • The proposed rules now stipulate the need for two internal reconciliations (if relevant funds are not directly received into a designated safeguarding bank account); the overall “Internal Safeguarding Reconciliation” and the “Internal Deposit Reconciliation”.
  • Meeting the requirements for the expected frequency of reconciliations, which is any day on which the relevant payment service provider is open for business as required for the execution of a payment transaction. This could mean firms must complete reconciliations over the weekend and bank holidays.


Internal Safeguarding Reconciliations

The internal reconciliation must be carried out as regularly as necessary but at least once each business day to check that:

“The amount of relevant funds that it safeguards (the resource) is equal to the amount of relevant funds it should safeguard (the requirement)”

The rules introduce the CASS terminology of ‘Resource’ and ‘Requirement’ to establish the two sides of the internal reconciliation, with each being clearly outlined (see CASS 15.12.18R et seq). One key clarification from current practice is that the Resource is now to include both amounts in the safeguarded bank accounts that are held and amounts received but not yet placed in the safeguarded bank accounts.

The interim rules clarify that firms must use the values contained in its internal records and ledgers. These internal records:
a) Must be genuinely independent from one another – a single internal client record cannot be re-purposed to set out both the resource and the requirement; and
b) Must not be based on information received in statements from third parties.

Note: a safeguarding institution that uses only the insurance or guarantee method and does so using an insurance policy or guarantee that is unlimited in the amount of cover it provides, does not need to carry out an internal safeguarding reconciliation but must carry out a daily calculation of its safeguarding requirement.

Internal Deposit Reconciliation

Where firms hold relevant funds other than in a safeguarding account, an additional internal reconciliation over and above the reconciliation outlined above must be performed.

This will check that the amount of relevant funds the institution holds in relevant funds bank accounts (“relevant funds deposit resource”) is equal to the amount of relevant funds it should hold in relevant funds bank accounts (“relevant funds deposit requirement”).

This will be applicable for firms that either receive relevant funds into a segregated account before being moved to a safeguarding account (if still held the day after receipt) and/or receive relevant funds in the first instance via an acquirer, payment account or in the form of cash/cheques.

External Relevant Funds Reconciliations

Firms will need to conduct reconciliations between internal records and the third parties it uses to hold relevant funds and relevant assets. This also includes any third party the firm uses to manage relevant assets.

The external reconciliation compares the balance, currency by currency, as recorded by the safeguarding institution, of each relevant funds account against the balance as per the most recent statement or confirmation. The asset reconciliations are to reconcile the quantity of relevant assets, not their values.

Note: Insurance policies and guarantees are not subject to the external safeguarding reconciliation.

Reconciliation Differences and Discrepancies
 

Internal Reconciliations
Discrepancies identified by the internal reconciliation must be investigated promptly. Firms must determine the reason for the discrepancy and ensure that any shortfall is funded / any excess is withdrawn as soon as possible and by no later than close of business on the business day which the reconciliation is performed.

Similarly, where there is a difference in the second reconciliation between the relevant funds deposit requirement and the relevant funds deposit resource, the above requirement also applies, to ensure that the balance on the relevant funds bank accounts reflects the relevant funds deposit requirement.

Where it is not possible to pay relevant funds into the relevant funds bank account, the payment must be made from the firm’s own funds, even if this leads to a discrepancy between the relevant funds requirement and the relevant funds resource.

External Reconciliations
Where the firm’s external reconciliations identify a discrepancy, the firm must investigate the reason for the discrepancy and take all reasonable steps to resolve it without undue delay, unless it arose solely as a timing difference between internal and external accounting systems.

If the discrepancy cannot be immediately resolved and one record or set of records indicates a need to have a greater amount of relevant funds in the account, the firm must assume, until resolved, that the record showing the greater amount is accurate and pay its own funds into a relevant funds bank account.

Having sufficient skills and resources will be key in achieving this.

Frequency of Reconciliations
Firm’s will be required to establish, implement and maintain adequate policies and procedures which will at a minimum include detailed considerations around the firm’s required reconciliations frequency. Firms should consider whether their explanations for determined frequencies of reconciliations are justifiable and clearly documented, including all of the mandatory considerations and being cognisant of the minimum frequency requirements (as well as the change of glossary definition of “business day”).

Notification Requirements
Firms will be required to inform the FCA in writing without delay if it will be unable to, or materially fails to:

  • conduct an internal safeguarding reconciliation;
  • pay any shortfall into a relevant funds bank account or withdraw any excess from an account holding relevant funds after carrying out an internal safeguarding reconciliation;
  • conduct an external safeguarding reconciliation; or
  • identify and resolve any discrepancies after having carried out an external safeguarding reconciliation.
     

So what do you need to do?
 

  • Review your safeguarding reconciliation policies and procedures – do these currently include all of the relevant considerations?
  • Review current record keeping – are your books and records designed with double-entry book keeping and independent from bank statements?
  • Review current reconciliation systems, processes and controls – are these designed to facilitate genuinely internal reconciliations as well as external reconciliations? Or are these currently being performed as one?
  • Begin designing the internal reconciliation between deposit resource and deposit requirement (where the firm holds relevant funds outside of a safeguarding account) and associated controls.
  • Review your discrepancy management processes and controls – are these fit for purpose?
  • Ensure that your staff have sufficient knowledge, skills and training on the new safeguarding requirements.
     

How can we help?
 

Our designated specialist Client Assets and Safeguarding team includes ex-regulator payments specialists, industry SME’s whom have direct experience of designing and implementing both UK and global Safeguarding policy and reconciliation frameworks, and seasoned CASS & Safeguarding auditors who are able to assist in helping you understand auditor and regulator expectations alike.

We can help you design and build out your policy and reconciliation structures and/or perform reviews over documentation and reconciliation processes already implemented. Whether this is providing recommendations on a reconciliations policy, design and implementation of an entirely new reconciliation system/process from scratch, and everything in between.

Ensuring that individuals and the Board are sufficiently skilled in safeguarding is also of critical importance – our tailored safeguarding training programmes can help you achieve just that.

Please reach out to one of our team to discuss how we can help you.