Client Assets (CASS): modest reform, same robust protection

The FCA recently published Handbook Notice 142, which includes a collection of amendments to CASS 6 and CASS 7. These developments follow CP25/37 and contribute towards a broader commitment from the FCA to improve alignment with the Consumer Duty (following FS25/2), and to be a more proportionate, effective and outcomes-focused regulator. Collectively, the changes aim to better reflect current market practice and improve clarity and consistency in application, without weakening protection. In turn, they are intended to reduce the number of recurring technical breaches caused by factors outside of firms’ control. However, some CASS firms may question whether these changes go far enough.

The rule changes span five specific areas as outlined below.

Due diligence record-keeping requirements

Under the revised rules, firms must retain CASS 6 and CASS 7 due diligence records for five years from the date they were created or last modified, rather than five years after the third-party relationship ends. For many firms, this removes ongoing issues around perpetual breaches, where a historical administrative gap had created a recurring breach for long-standing third-party relationships. However, it’s important to note that the existing rules for due diligence haven’t changed, only the record retention rule.

Record sources for external custody reconciliations

The FCA has now formally recognised Euroclear’s Investment Funds Service (IFS) System Record as a valid source for external custody reconciliations, removing the current need for firms to apply for a rule waiver. However, this concession comes with strings attached as firms will now require a written agreement with Euroclear, including its specific contractual undertaking for daily and monthly reconciliations and notifications to the firm to ensure the continued effective management of discrepancies.

Looking beyond Euroclear, the FCA has indicated that it will consider its approach to other entities or alternative data sources “where opportunities to do so arise”.

Despite this development around third parties, many CASS firms may be surprised that these targeted rule changes do not attempt to address firms’ growing use of payment service providers (PSPs) in the context of their potential (non)-compliance with the ‘normal approach’.

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Statement frequency for external custody reconciliations

The FCA has introduced a targeted exemption from (at least) monthly reconciliations which applies narrowly to two scenarios. The first is where a third party fails to provide timely information due to factors specific to the assets themselves, such as insolvency or de-listing. The second is where a third party refuses to provide information at the required frequency, but where it isn’t practicable to use an alternative provider.

While this is beneficial to certain firms, again, additional conditions apply through ten new CASS rules here. Firms using this exemption must still reconcile “at the greatest frequency possible” and must annually assess whether the circumstances allowing for the exemption still apply.

Notably, this exemption doesn’t apply to other delays such as systems outages or wider operational issues. The changes also reaffirm the judgement inherent in firms’ existing due diligence obligations since if the situation persists, then firms will need to consider whether the relevant third-party arrangement remains appropriate.

Consumer Duty in CASS

The Consumer Duty is central to the FCA’s strategy, and has been further established through its inclusion into CASS 6 and 7.

For retail clients, firms can only retain interest earned on client money or use safe custody assets for securities financing transactions if this is compatible with the Consumer Duty, building on the existing conditions for notification and prior consent respectively.

Despite these changes, the Consumer Duty will continue to be outside of the scope of the annual CASS audit (and therefore require a subtle but important amendment to the auditor’s standard opinion wording). However, this doesn’t change auditors’ existing statutory duty under FSMA to report matters of concern to the FCA.

To avoid legal ambiguity, the FCA has removed the private rights of action for breaches of the Consumer Duty. This will avoid unintended consequences, where references in CASS to the Consumer Duty could otherwise be used to bring claims against firms.

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Treatment of interest

These changes provide some helpful leniency to firms around the treatment of bank interest where previous breaches have been outside of their control.

In future, if a bank pays firm-owned interest (that isn’t part of a mixed-remittance payment) into a client bank account, then this won’t represent a CASS breach. However, firms must have written evidence to show that they have requested it to be paid into a separate firm account (a single request may cover multiple client bank accounts). Otherwise, the firm must move the money out of the client account within one business day.

Notably, at this point in time, an equivalent rule change hasn’t been applied to other firm-owed amounts, such as fees, and so firms should continue to follow existing rules here.

By making a written election, firms will also benefit from some flexibility if they are currently experiencing a misalignment between the contractual date on which interest becomes due and payable to clients, and the date on which the bank remits interest into client bank accounts. The FCA will now allow firms to treat that interest as unallocated client money from the date of receipt.

Despite the length and granularity of additional provisions, these changes are intended to reduce technical breaches resulting from third-party processes outside of a firm’s control, without weakening client money protection.

Next steps for CASS firms

Primarily taking effect on 25 September 2026, these changes are intended to remove CASS breaches that currently arise for reasons outside of a firms’ control, and go some way to recognising current market practice. As such, firms should carefully review the applicability of these changes to minimise existing or potential future instances of non-compliance.

However, many of these rule changes come with conditions attached and have ultimately expanded an already detailed and complex regulatory regime. So, as CASS compliance has always required, effective adoption of these new rules will require close scrutiny and attention to detail.

For further information on CASS compliance and the changes in Handbook Notice 142, contact Shermeen Kazmi or Paul Staples.