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CASS 6.6 Records, accounts and reconciliations

1Records and accounts

CASS 6.6.1G

This section sets out the requirements a firm must meet when keeping records and accounts of the safe custody assets it holds for clients.

CASS 6.6.2R

A firm must keep such records and accounts as necessary to enable it at any time and without delay to distinguish safe custody assets held for one client from safe custody assets held for any other client, and from the firm's own applicable assets.

[Note: article 16(1)(a) of the MiFID implementing Directive]

CASS 6.6.3R

A firm must maintain its records and accounts in a way that ensures their accuracy, and in particular their correspondence to the safe custody assets held for clients.

[Note: article 16(1)(b) of the MiFID implementing Directive]

CASS 6.6.4R
CASS 6.6.5G

The requirements in CASS 6.6.2 R to CASS 6.6.4 R are for a firm to keep internal records and accounts of clients' safe custody assets. Therefore any records falling under those requirements should be maintained by the firm, and should be separate to any records the firm may have obtained from any third parties, such as those with whom it may have deposited, or through whom it may have registered legal title to, clients' safe custody assets.

Right to use agreements

CASS 6.6.6R

A firm must keep a copy of every executed client agreement that includes that firm's right to use safe custody assets for its own account (see CASS 6.4.1 R), including in the case of a prime brokerage agreement the disclosure annex referred to in CASS 9.3.1 R.

General record-keeping

CASS 6.6.7R

Unless otherwise stated, a firm must ensure that any record made under the custody rules is retained for a period of five years starting from the later of:

  1. (1)

    the date it was created; and

  2. (2)

    (if it has been modified since the date it was created), the date it was most recently modified.

CASS 6.6.8R

For each internal custody record check, each physical asset reconciliation and each external custody reconciliation carried out by a firm, it must make a record including:

  1. (1)

    the date it carried out the relevant process;

  2. (2)

    the actions the firm took in carrying out the relevant process; and

  3. (3)

    a list of any discrepancies the firm identified and the actions the firm took to resolve those discrepancies.

Policies and procedures

CASS 6.6.9G

Firms are reminded that they must, under SYSC 6.1.1 R, establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm with the rules in this chapter. This should include, for example, establishing and maintaining policies and procedures concerning:

  1. (1)

    the frequency and method of the checks and reconciliations the firm is required to carry out under this section;

  2. (2)

    the frequency with which the firm is required to review its arrangements in compliance with this chapter; and

  3. (3)

    the resolution of discrepancies and the treatment of shortfalls under this section.

Internal custody record checks

CASS 6.6.10G
  1. (1)

    An internal custody record check is one of the steps a firm takes to satisfy its obligations under:

    1. (a)

      Principle 10 (Clients' assets);

    2. (b)

      CASS 6.2.2 R (Requirement to have adequate organisational arrangements);

    3. (c)

      CASS 6.6.2 R to CASS 6.6.4 R (Records and accounts); and

    4. (d)

      where relevant, SYSC 4.1.1 R (General requirements) and SYSC 6.1.1 R (Compliance).

  2. (2)

    An internal custody record check is a check as to whether the firm's records and accounts of the safe custody assets held by the firm (including, for example, those deposited with third parties under CASS 6.3 (Depositing safe custody assets with third parties)) correspond with the firm's obligations to its clients to hold those safe custody assets.

CASS 6.6.10AR

7CASS 6.6.11R does not apply to a firm following its failure.

CASS 6.6.10BG

7CASS 6.6.46AR (Frequency of checks and reconciliations after failure) applies to a firm following its failure.

CASS 6.6.11R
  1. (1)

    A firm must perform an internal custody record check:

    1. (a)

      subject to paragraph7 (2), as regularly as is necessary but without allowing more than one month to pass between each internal custody record check; and

    2. (b)

      as soon as reasonably practicable after the date to which the internal custody record check relates.

  2. (2)

    A firm that holds no safe custody assets other than physical safe custody assets must perform an internal custody record check as regularly as necessary but, in any case, no less often than its physical asset reconciliations under CASS 6.6.22 R.

CASS 6.6.12G

CASS 6.6.44 R sets out the matters which a firm must have regard to when determining the frequency at which to undertake an internal custody record check.

CASS 6.6.13R

A firm must perform an internal custody record check using either the internal custody reconciliation method or the internal system evaluation method. It must not use a combination of these methods.

CASS 6.6.14R

A firm must only use its internal records (for example its depot and client-specific ledgers for safe custody assets or other internal accounting records) in order to perform an internal custody record check.

CASS 6.6.15G

CASS 6.6.14 R means that a firm must not base its internal custody record checks on any records that the firm may have obtained from any third parties, such as those with whom it may have deposited, or through whom it may have registered legal title to, clients' safe custody assets.

The internal custody reconciliation method for internal custody record checks

CASS 6.6.16R
CASS 6.6.17R

The internal system evaluation method for internal custody record checks

CASS 6.6.18G
  1. (1)

    The internal system evaluation method is available to any firm, including one that is not able to use the internal custody reconciliation method because it does not meet the requirements at CASS 6.6.16R (1) and CASS 6.6.16R (2).

  2. (2)

    The purpose of the internal system evaluation method is to detect weaknesses in a firm's systems and controls and any recordkeeping discrepancies. However, this method is not designed to substitute a firm's other measures for ensuring compliance with the custody rules, such as monitoring the accuracy of its records (see also CASS 6.2.2 R and CASS 6.6.3 R).

CASS 6.6.19R

The internal system evaluation method requires a firm to:

  1. (1)

    establish a process that evaluates:

    1. (a)

      the completeness and accuracy of the firm's internal records and accounts of safe custody assets held by the firm for clients, in particular whether sufficient information is being completely and accurately recorded by the firm to enable it to:

      1. (i)

        comply with CASS 6.6.4 R; and

      2. (ii)

        readily determine the total of all the safe custody assets that the firm holds for its clients; and

    2. (b)

      whether the firm's systems and controls correctly identify and resolve all discrepancies in its internal records and accounts of safe custody assets held by the firm for clients;

  2. (2)

    run the evaluation process established under (1) on the date of each internal custody record check; and

  3. (3)

    promptly investigate and, without undue delay, resolve any causes of discrepancies that the evaluation process reveals.

CASS 6.6.20G

The evaluation process under CASS 6.6.19R (1) should verify that the firm's systems and controls correctly identify and resolve at least the following types or causes of discrepancies:

  1. (1)

    items in the firm's records and accounts that might be erroneously overstating or understating the safe custody assets held by a firm (for example, 'test' entries and 'balancing' entries);

  2. (2)

    negative balances;

  3. (3)

    processing errors;

  4. (4)

    journal entry errors (eg, omissions and unauthorised system entries); and

  5. (5)

    IT errors (eg, software issues that could lead to inaccurate records).

Physical asset reconciliations

CASS 6.6.21G
  1. (1)

    A physical asset reconciliation is a separate process to the internal custody record check. Firms that hold physical safe custody assets for clients are required to perform both processes.

  2. (2)

    The purpose of a physical asset reconciliation is to check that a firm's internal records and accounts of the physical safe custody assets kept by the firm for clients are accurate and complete, and to ensure any discrepancies are investigated and resolved.

CASS 6.6.21AR

7CASS 6.6.22R does not apply to a firm following its failure.

CASS 6.6.21BG

7CASS 6.6.46AR (Frequency of checks and reconciliations after failure) applies to a firm following its failure.

CASS 6.6.22R

A firm that holds physical safe custody assets must perform a physical asset reconciliation for all the physical safe custody assets it holds for clients:

  1. (1)

    as regularly as is necessary but without allowing more than six months to pass between each physical asset reconciliation; and

  2. (2)

    as soon as reasonably practicable after the date to which the physical asset reconciliation relates.

CASS 6.6.23G

CASS 6.6.44 R sets out the matters which a firm must have regard to when determining the frequency at which to undertake a physical asset reconciliation.

CASS 6.6.24R

When performing a physical asset reconciliation a firm must:

  1. (1)

    count all the physical safe custody assets held by the firm for clients as at the date to which the physical asset reconciliation relates; and

  2. (2)

    compare the count in (1) against what the firm's internal records and accounts state as being in the firm's possession as at the same date.

CASS 6.6.25R
CASS 6.6.26G

Regardless of the method used, a firm should ensure that all safe custody assets held by the firm as physical safe custody assets for clients are subject to a physical asset reconciliation at the frequency required under CASS 6.6.22 R.

CASS 6.6.27R

If a firm completes a physical asset reconciliation in a single stage, such that the firm:

  1. (1)

    performs a single count under CASS 6.6.24R (1) which encompasses all the physical safe custody assets held by the firm for clients as at the date to which the physical asset reconciliation relates; and

  2. (2)

    compares that count against the firm's internal records and accounts in accordance with CASS 6.6.24R (2);

then the firm will have used the total count method for that physical asset reconciliation.

CASS 6.6.28R

If a firm completes a physical asset reconciliation in two or more stages, such that the firm:

  1. (1)

    performs two or more counts under CASS 6.6.24R (1) (each on a separate occasion and relating to a different stock line or group of stock lines forming part of the firm's overall holdings of physical safe custody assets) which, once all of the counts are complete, encompass all the physical safe custody assets held by the firm for clients; and

  2. (2)

    compares each of those counts against the firm's internal records and accounts in accordance with CASS 6.6.24R (2);

then the firm will have used the rolling stock method for that physical asset reconciliation.

CASS 6.6.29G
  1. (1)

    The rolling stock method allows a firm to perform its physical asset reconciliation in several stages, with each stage referring to a line of stock or group of stock lines in a designated investment selected by a firm (for example, all the shares with an issuer whose name begins with the letter 'A' or all the stock lines held in connection with a particular business line).

  2. (2)

    Where a firm uses the rolling stock method to perform a physical asset reconciliation, all the stages in that physical asset reconciliation must be completed in time to ensure the firm complies with CASS 6.6.22 R.

CASS 6.6.30R
  1. (1)

    If a firm wishes to use the rolling stock method to perform a physical asset reconciliation it must first establish and document in writing its reasons for concluding that the way in which it will carry out its physical asset reconciliations is adequately designed to mitigate the risk of the firm's records being manipulated or falsified.

  2. (2)

    A firm must retain any documents created under (1) for a period of at least five years after the date it ceases to use the rolling stock method to perform its physical asset reconciliation.

CASS 6.6.31G

The documents under CASS 6.6.30R (1) should, for example, cover the systems and controls the firm will have in place to mitigate the risk of 'teeming and lading' in respect of all the physical safe custody assets held by the firm for clients and across all the firm's business lines.

CASS 6.6.32G

To meet the requirement to have adequate organisational arrangements under CASS 6.2.2 R, a firm should consider performing 'spot checks' as to whether title to an appropriate sample of physical safe custody assets that it holds is registered correctly under CASS 6.2.3 R (Registration and recording of legal title).

External custody reconciliations

CASS 6.6.33G

The purpose of an external custody reconciliation is to ensure the completeness and accuracy of a firm's internal records and accounts of safe custody assets held by the firm for clients against those of relevant third parties.

CASS 6.6.34R

A firm must conduct, on a regular basis, reconciliations between its internal records and accounts of safe custody assets held by the firm for clients and those of any third parties by whom those safe custody assets are held.

[Note: article 16(1)(c) of the MiFID implementing Directive]

CASS 6.6.35R

In CASS 6.6.34 R, the third parties whose records and accounts a firm is required to reconcile its own internal records and accounts with must include:

  1. (1)

    the third parties with which the firm has deposited clients' safe custody assets;

    3
  2. (2)

    where the firm has not deposited a client's safe custody asset with a third party:

    3
    1. (a)

      the third parties responsible for the registration of legal title to that safe custody asset; or3

      3
    2. (b)

      a person acting as an operator for the purposes of any of the relevant overseas USRs if:3

      1. (i)

        the safe custody asset is an uncertificated unit of a security governed by any of the relevant overseas USRs; and3

      2. (ii)

        the firm has reasonable grounds to be satisfied that the records of that person take into account all instructions issued by that person which require an issuer to register on a register of securities a transfer of title to any uncertificated units.3

CASS 6.6.36G

Examples of the sorts of third parties referred to at CASS 6.6.35R (2)(a) 3 include central securities depositaries, operators of collective investment schemes, and administrators of offshore funds.

3
CASS 6.6.36AR

7CASS 6.6.37R does not apply to a firm following its failure.

CASS 6.6.36BG

7CASS 6.6.46AR (Frequency of checks and reconciliations after failure) applies to a firm following its failure.

CASS 6.6.37R

A firm must conduct external custody reconciliations:

  1. (1)

    as regularly as necessary but allowing2 no more than one month to pass2 between each external custody reconciliation; and

  2. (2)

    as soon as reasonably practicable after the date to which the external custody reconciliation relates.

CASS 6.6.38G

CASS 6.6.44 R sets out the matters which a firm must consider when determining the frequency at which to undertake an external custody reconciliation.

CASS 6.6.39G

Where a firm holds clients' safe custody assets electronically with a central securities depositary which is able to provide adequate information to the firm on its holdings on a daily basis, it is best practice under CASS 6.6.37R (1) for the firm to conduct an external custody reconciliation each business day in respect of those assets.

CASS 6.6.40G

Where a firm deposits safe custody assets belonging to a client with a third party or where a third party is responsible for the registration of legal title to that asset,2 in complying with the requirements of CASS 6.6.34 R, the firm should seek to ensure that the third party provides the firm with adequate information (for example in the form of a statement) as at a date specified by the firm which details the description and amounts of all the safe custody assets credited to the relevant account(s) and that this information is provided in sufficient time to allow the firm to carry out its external custody reconciliations under CASS 6.6.37 R.

CASS 6.6.41G

If a firm acting as trustee or depositary of an AIF that is an authorised AIF deposits safe custody assets belonging to a client with a third party, under article 89(1)(c) (Safekeeping duties with regard to assets held in custody) of the AIFMD level 2 regulation, the firm should seek to ensure that the third party provides the firm with adequate information (for example in the form of a statement) as at a date or dates specified by the firm which details the description and amounts of all the safe custody assets credited to the account(s) and that this information is provided in adequate time to allow the firm to carry out the periodic reconciliations required under article 89(1)(c) (Safekeeping duties with regard to assets held in custody) of the AIFMD level 2 regulation.

CASS 6.6.41AG

5If a firm acting as trustee or depositary of a UCITS deposits safe custody assets belonging to a client with a third party, under article 13(1)(c) (Safekeeping duties with regard to assets held in custody) of the UCITS level 2 regulation, the firm should seek to ensure that:

  1. (1)

    the third party provides the firm with adequate information (for example in the form of a statement):

    1. (a)

      as at a date or dates specified by the firm; and

    2. (b)

      which details the description and amounts of all the safe custody assets credited to the account(s); and

  2. (2)

    such information is provided in adequate time to allow the firm to carry out the periodic reconciliations required under article 13(1)(c) of the UCITS level 2 regulation.

CASS 6.6.42G

External custody reconciliations must be performed for each safe custody asset held by the firm for its clients, except for physical safe custody assets. A reconciliation of transactions involving safe custody assets, rather than of the safe custody assets themselves, will not satisfy the requirement under CASS 6.6.34 R.

CASS 6.6.43G

A firm acting as trustee or depositary of an AIF that is an authorised AIF should perform the reconciliation under article 89(1)(c) (Safekeeping duties with regard to assets held in custody) of the AIFMD level 2 regulation:

  1. (1)

    as regularly as is necessary having regard to the frequency, number and value of transactions which the firm undertakes in respect of safe custody assets, but with no more than one month between each reconciliation; and

  2. (2)

    as soon as reasonably practicable after the date to which the reconciliation relates;

to ensure the accuracy of its internal records and accounts against those of third parties by whom client's safe custody assets are held.

Frequency of checks and reconciliations under this section

CASS 6.6.43AR

7CASS 6.6.44R to CASS 6.6.46R do not apply to a firm following its failure.

CASS 6.6.43BG

7CASS 6.6.46AR (Frequency of checks and reconciliations after failure) applies to a firm following its failure in respect of the frequency at which the firm undertakes its internal custody record checks under CASS 6.6.11R, physical asset reconciliations under CASS 6.6.22R, and external custody reconciliations under CASS 6.6.37R.

CASS 6.6.44R

When determining the frequency at which it will undertake its internal custody record checks under CASS 6.6.11 R, physical asset reconciliations under CASS 6.6.22 R, and external custody reconciliations under CASS 6.6.37 R, a firm must have regard to:

  1. (1)

    the frequency, number and value of transactions which the firm undertakes in respect of clients' safe custody assets; and

  2. (2)

    the risks to which clients' safe custody assets are exposed, such as the nature, volume and complexity of the firm's business and where and with whom safe custody assets are held.

CASS 6.6.45R
  1. (1)

    A firm must make and retain records sufficient to show and explain any decision it has taken under CASS 6.6.44 R when determining the frequency of its internal custody record checks, physical asset reconciliations and external custody reconciliations. Subject to (2), such records must be retained indefinitely.

  2. (2)

    If any decision under CASS 6.6.44 R is superseded by a subsequent decision under that rule then the record of that earlier decision retained in accordance with (1) need only be retained for a further period of five years from the subsequent decision.

CASS 6.6.46R
  1. (1)

    Subject to (3), a firm must review the frequency at which it conducts internal custody record checks, physical asset reconciliations and external custody reconciliations at least annually to ensure that it continues to comply with CASS 6.6.11 R, CASS 6.6.22 R and CASS 6.6.37 R, respectively, and has given due consideration to the matters in CASS 6.6.44 R.

  2. (2)

    For each review a firm undertakes under (1), it must record the date and the actions it took in reviewing the frequency of its internal custody record checks, physical asset reconciliations and external custody reconciliations.

  3. (3)

    A firm need not carry out a review under (1) in respect of its internal custody record checks, physical asset reconciliations and external custody reconciliations, if it already conducts the particular process in respect of all relevant safe custody assets each business day.

Frequency of checks and reconciliations after failure

CASS 6.6.46AR
  1. (1)

    7This rule applies to a firm following its failure.

  2. (2)

    A firm must perform an internal custody record check and a physical asset reconciliation that relates to the time of its failure as soon as reasonably practicable after its failure.

  3. (3)
    1. (a)

      A firm must perform an external custody reconciliation that relates to the time of its failure as soon as reasonably practicable after its failure.

    2. (b)

      If any records and accounts of the relevant third parties under CASS 6.6.35R relating to the time of the firm’s failure are unavailable, the firm must use the next available records and accounts to perform the external custody reconciliation under sub-paragraph (a).

  4. (4)

    A firm must perform further internal custody record checks and physical asset reconciliations:

    1. (a)

      as regularly as is necessary to ensure that the firm remains in compliance with CASS 6.6.2R, CASS 6.6.3R and CASS 6.6.4R (Records and accounts); and

    2. (b)

      as soon as reasonably practicable after the date to which the internal custody record check or physical asset reconciliation relates.

  5. (5)

    A firm must perform further external custody reconciliations on a regular basis:

    1. (a)

      as regularly as is necessary; and

    2. (b)

      as soon as reasonably practicable after the date to which the external custody reconciliation relates.

  6. (6)

    A firm must determine the frequency at which it will undertake its internal custody record checks and physical asset reconciliations under paragraph (4), and its external custody reconciliations under paragraph (5) with regard to:

    1. (a)

      the frequency, number and value of transactions which the firm undertakes in respect of clients’ safe custody assets;

    2. (b)

      the risks to which clients’ safe custody assets are exposed, such as the nature, volume and complexity of the firm’s business, and where and with whom safe custody assets are held; and

    3. (c)

      the need to comply with CASS 6.7.

CASS 6.6.46BG
  1. (1)

    7The reference point for the internal custody record check and physical asset reconciliation under CASS 6.6.46A(2) and the external custody reconciliation under 6.6.46A(3)(a) should be the precise point in time at which the firm’s failure occurred.

  2. (2)

    The reference point for any further internal custody record checks and physical asset reconciliations under CASS 6.6.46A(4) and any further external custody reconciliations under 6.6.46A(5) can be determined by the firm.

Independence of person performing checks and reconciliations

CASS 6.6.47G

Whenever possible, a firm should ensure that checks and reconciliations are carried out by a person (for example an employee of the firm) who is independent of the production or maintenance of the records to be checked and/or reconciled.

Resolution of discrepancies

CASS 6.6.48G

In this section, a discrepancy should not be considered to be resolved until it is fully investigated and corrected, and any associated shortfall is made good by way of the firm ensuring that:

  1. (1)

    it is holding (under the custody rules) each of the safe custody assets that the firm ought to be holding for each of its clients; and

  2. (2)

    its own records, and the records of any relevant other person (such as a third party with whom the firm deposited the safe custody assets) accurately correspond to the position under (1).

CASS 6.6.49R

When a firm identifies a discrepancy as a result of carrying out an internal custody record check, physical asset reconciliation or external custody reconciliation, the firm must:2

  1. (1)

    promptly investigate the reason for the discrepancy and resolve it without undue delay; and2

  2. (2)

    take appropriate steps under CASS 6.6.54 R for the treatment of any shortfalls until that discrepancy is resolved.2

CASS 6.6.50R

When a firm identifies a discrepancy outside of its processes for an internal custody record check, physical asset reconciliation or external custody reconciliation, the firm must:2

  1. (1)

    take all reasonable steps both to investigate the reason for the discrepancy and to resolve it; and2

  2. (2)

    take appropriate steps under CASS 6.6.54 R for the treatment of shortfalls until that discrepancy is resolved.2

CASS 6.6.51G

Where the discrepancy identified under CASS 6.6.49 R or CASS 6.6.50 R has arisen as a result of a breach of thecustody rules, the firm should ensure it takes sufficient steps to avoid a reoccurrence of that breach (see Principle 10 (Clients' assets), CASS 6.6.3 R and, as applicable, SYSC 4.1.1R (1) and SYSC 6.1.1 R).

CASS 6.6.52G

Items recorded or held within a suspense or error account fall within the scope of discrepancies in this section.

CASS 6.6.53G

Items recorded in a firm's records and accounts that are no longer recorded by relevant third parties (such as 'liquidated stocks') also fall within the scope of discrepancies in this section.

Treatment of shortfalls

CASS 6.6.54R
  1. (1)

    This rule applies where a firm identifies a discrepancy as a result of, or that reveals, a shortfall, which the firm has not yet resolved.

  2. (2)

    Subject to paragraphs (3) and (4)7, until the discrepancy is resolved a firm must do one of the following:

    1. (a)

      appropriate a sufficient number of its own applicable assets to cover the value of the shortfall and hold them for the relevant clients under the custody rules in such a way that the applicable assets, or the proceeds of their liquidation, will be available for distribution for the benefit of the relevant clients in the event of the firm's failure and, in doing so:

      1. (i)

        ensure that the applicable assets are clearly identifiable as separate from the firm's own property and are recorded by the firm in its client-specific safe custody asset record as being held for the relevant client;

      2. (ii)

        keep a record of the actions the firm has taken under this rule which includes a description of the shortfall, identifies the relevant affected clients, and lists the applicable assets that the firm has appropriated to cover the shortfall; and

      3. (iii)

        update the record made under (ii) whenever the discrepancy is resolved and the firm has re-appropriated the applicable assets; or

    2. (b)

      (provided that doing so is consistent with the firm's permissions and would result in money being held for the relevant client) in respect of the shortfall under CASS 7.17.2 R2 (statutory trust) appropriate a sufficient amount of its own money to cover the value of the shortfall, hold it for the relevant client as client money under the client money rules and, in doing so:

      1. (i)

        ensure the money is segregated under CASS 7.13 (Segregation of client money) and recorded as being held for the relevant client under CASS 7.15 (Records, accounts and reconciliations);

      2. (ii)

        keep a record of the actions the firm has taken under this rule which includes a description of the shortfall, identifies the relevant affected clients, and specifies the amount of money that the firm has appropriated to cover the shortfall; and

      3. (iii)

        update the record made under (ii) whenever the discrepancy is resolved and the firm has re-appropriated the money; or

    3. (c)

      appropriate a number of applicable assets in accordance with (a) and an amount of money in accordance with (b) which, in aggregate, are sufficient to cover the value of the shortfall.

  3. (3)

    If the firm, where justified, concludes that another person is responsible for the discrepancy,2 regardless of any dispute with that other person, or that2 the discrepancy is due to a timing difference between the accounting systems of that other person and that of the firm, the firm must take all reasonable steps to resolve the situation without undue delay with the other person. Until the discrepancy is resolved the firm must consider whether it would be appropriate to notify the affected client of the situation, and may take steps under (2) for the treatment of shortfalls until that discrepancy is resolved.

  4. (4)

    A firm that has failed is not required to take steps under paragraph (2) in relation to the firm’s own applicable assets or money in so far as the legal procedure for the firm’s failure prevents the firm from taking any such steps.7

CASS 6.6.55G

In considering whether it should notify affected clients under CASS 6.6.54R (3), a firm should have regard to its obligations under the client's best interests rule to act honestly, fairly and professionally in accordance with the best interests of its clients, and to Principle 7 (communications with clients).

CASS 6.6.56G
  1. (1)

    The value of a shortfall for the purposes of CASS 6.6.54 R may be determined by the previous day's closing mark to market valuation, or if in relation to a particular safe custody asset none is available, the most recently available valuation.

  2. (2)

    Where a firm is taking the measures under CASS 6.6.54R (2) in respect of a particular shortfall it should, as regularly as necessary, and having regard to Principle 10:

    1. (a)

      review the value of the shortfall in line with (1); and

    2. (b)

      where the firm has found that the value of the shortfall has changed, adjust either or both the number of own applicable assets or the amount of money it has appropriated to ensure that in aggregate the assets and monies set aside are sufficient to cover the changed value of the shortfall.

CASS 6.6.56AG

7CASS 6.6.54R(4) recognises that a failed firm is required to investigate and resolve discrepancies, but the extent to which it is able to address shortfalls pending the resolution of discrepancies may be limited by insolvency law, for example.

Notification requirements

CASS 6.6.57R

A firm must inform the FCA in writing without delay if:

  1. (1)

    its internal records and accounts of the safe custody assets held by the firm for clients are materially out of date, or materially inaccurate or invalid, so that the firm is no longer able to comply with the requirements in CASS 6.6.2 R to CASS 6.6.4 R; or

  2. (2)

    5it is a firm acting as trustee or depositary of an AIF and has not complied with, or is materially unable to comply with, the requirements in CASS 6.6.2 R or in article 89(1)(b) or 89(1)(c) (Safekeeping duties with regard to assets held in custody) of the AIFMD level 2 regulation; or

  3. (2A)

    5it is a firm acting as trustee or depositary of a UCITS and has not complied with, or is materially unable to comply with, the requirements in:

    1. (a)

      5CASS 6.6.2R; or

    2. (b)

      5article 13(1)(b) or 13(1)(c) (Safekeeping duties with regard to assets held in custody) of the UCITS level 2 regulation; or

  4. (3)

    it will be unable, or materially fails, to take the steps required under CASS 6.6.54 R for the treatment of shortfalls; or

  5. (4)

    it will be unable, or materially fails, to conduct an internal custody record check in compliance with CASS 6.6.11 R to CASS 6.6.19 R; or

  6. (5)

    it will be unable, or materially fails, to conduct a physical asset reconciliation in compliance with CASS 6.6.22 R4 to CASS 6.6.30 R; or

  7. (6)

    it will be unable, or materially fails, to conduct an external custody reconciliation in compliance with CASS 6.6.34 R to CASS 6.6.37 R.

Annual audit of compliance with the custody rules

CASS 6.6.58G

Firms are reminded that the auditor of the firm has to confirm in the report submitted to the FCA under SUP 3.10 (Duties of auditors: notification and report on client assets) that the firm has maintained systems adequate to enable it to comply with the custody rules.