CASS 6.6 Records, accounts and reconciliations

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.

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 and that they may be used as an audit trail6.

A firm must maintain a client-specific safe custody asset record.

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.

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.

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.

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

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.

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.

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.

A firm may only use the internal custody reconciliation method if:

1. (1)

   it separately maintains an aggregate safe custody asset record and a client-specific safe custody asset record; and

2. (2)

   its aggregate safe custody asset record and its client-specific safe custody asset record are capable of being compared.

The internal custody reconciliation method requires a firm to perform a comparison between its aggregate safe custody asset record and its client-specific safe custody asset record, as at the date of the internal custody record check.

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.

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

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.

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.

A firm must perform each physical asset reconciliation under CASS 6.6.24 R using the total count method or the rolling stock method.

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.

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.

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.

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.

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

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

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.

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

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.

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.

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.

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.

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

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

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

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 UK UCITS8 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.