CASS 2.2 Segregation, registration and recording, and holding1

The rules governing the segregation, registration or recording, and holding of a client's safe custody investments require a clear distinction to be maintained, to the extent practicable, between safe custody investment held for the clients and those designated investments held for the firm.

A firm which is a trustee is bound in relation to safe custody investments by the terms of its trust and applicable law and CASS 2.2.3 R does not modify those obligations.

CASS 2.2.5 R refers to the firm's own records.

The registration and recording rules are designed to safeguard and secure a client's entitlement. The rules are not in order of priority and firms are expected to register and record the legal title of a safe custody investment in such a manner as to provide the client with appropriate protection.

If the client in CASS 2.2.10 R(1) is an authorised person and the safe custody investments belong to clients of that authorised person, it is the responsibility of that authorised person to ensure that the registering or recording is appropriate for the client concerned.

A firm that applies CASS 2.2.10 R (3) or (4) will be expected to demonstrate that adequate investigations have been made of the market concerned by reference to local sources which may include appropriate legal opinion.

The following rules are designed to provide an appropriate level of protection for a safe custody investment which the firm physically holds. A firm should ensure that the arrangements for holding any document of title to a safe custody investment are appropriate to the value and risk of loss of the safe custody investment concerned, and that there are adequate controls designed to safeguard it from damage, misappropriation or other loss.

In CASS 2.2.15 R reasonable steps may include on the basis of an appropriate legal opinion obtained by the firm or another person.

A firm that holds safe custody investments with a custodian or recommends custodians to private customers, is expected to establish and maintain a system for assessing the appropriateness of its selection of the custodian and to assess the continued appointment of that custodian periodically as often as is reasonable in the relevant market. In order to comply with SYSC 3.2.20 R (Records), the firm is also expected to make and retain a record of the grounds on which it satisfies itself as to the appropriateness of its selection or, following a periodic assessment, continued appropriateness of the custodian.

In undertaking an appropriate risk assessment of the custodian in accordance with CASS 2.2.18 R and CASS 2.2.19 R, firms might take into account any or all of the following matters:

1. (1)

   the expertise and market reputation of the custodian, and, once a safe custody investment has been lodged by the firm with the custodian, the custodian's performance of its services to the firm;

2. (2)

   the arrangements for holding and safeguarding an investment;

3. (3)

   an appropriate legal opinion as to the protection of custody assets in the event of the insolvency of the custodian;

4. (4)

   current industry standard reports, for example Financial reporting and auditing group (FRAG) 21 report or its equivalent;

5. (5)

   whether the custodian is regulated and by whom;

6. (6)

   the capital or financial resources of the custodian;

7. (7)

   the credit rating of the custodian;

8. (8)

   any other activities undertaken by the custodian and, if relevant, any affiliated company.

In undertaking the risk assessment of a custodian, a firm should have regard to all relevant circumstances including legal requirements and custodial practices, in the relevant jurisdiction. For example, if the legal requirements of a jurisdiction in which the firm proposes to hold a safe custody investment with a custodian, makes it mandatory to use a particular custodian for that purpose, then the FSA will regard this fact alone as justifying the use of that custodian. If the use of that custodian is a matter of custodial practice in that jurisdiction, the custodian is likely to be appropriate for that purpose subject to the firm checking whether following that practice is appropriate for the client's purposes. In both circumstances, the firm will still be under a duty to ensure the continued appropriateness of the custodian, taking account of the current legal requirements and custodial practice of that jurisdiction.