Getting ahead of the curve on CASS 15

So far, most of the focus on the FCA’s proposed new CASS 15 safeguarding regulations has centred on funds reconciliation. But this ‘tick-the-box’ lens misses the full implications of CASS 15, from the opportunity to strengthen visibility and control over clients’ assets, to the heightened risk of insolvency and potential conflict with other legal obligations. Understanding and proactively addressing these implications will help your payments services, e-money or credit union business to get ahead of the curve on CASS 15 and realise the potential value.

As a business that makes digital money transfers, you are expected to ringfence and protect client funds from the moment they are received. The safeguarding rules set out in the current Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs) aim to ensure that as much of the client money as possible can be returned to clients, if your business runs into trouble.

The more stringent new safeguarding rules set out in the FCA’s consultation paper CP24/20 (consultation runs until 17 December 2024) would bring the some 400 e-money and 1,600 payment services institutions into the CASS net for the first time.

E-money issuers held approximately £18 billion of funds in safeguarding accounts in 2023, an increase of almost 65% from the £11 billion held in 2021, and it is estimated that Payments Firms held £5 billion in relevant funds on any given day in the last year.

Inadequate safeguarding has resulted in significant consumer harm where firms have failed and entered insolvency.

The proposed step-up in regulation and enforcement follows FCA concerns over an increase in safeguarding issues, as highlighted by those firms that have failed in the last six years. In 2023, these lapses led to supervisory cases involving 15% of the firms covered by the existing rules.

For firms that became insolvent between 2018 and 2023, there was an average shortfall of 65% in funds owed to clients (the difference between funds owed and funds safeguarded). These shortfalls are not covered by the Financial Services Compensation Scheme (FSCS).

A chance to strengthen visibility and control

Given the volume of transactions covered, there is no doubting the scale of the compliance demands created by the proposed new ringfencing and reconciliation rules. However, if implemented and managed effectively, CASS 15 would help your business to identify risks to safeguarding funds early, and proactively rectify reconciliation issues.

Effective resolution planning is essential

Just as impactful as fund reconciliation is the need to create and maintain a resolution pack. The key aim of these resolution packs is to enable insolvency practitioners to retrieve the information that would help them to prioritise and achieve a timely return of relevant funds to consumers promptly.

The FCA outlined its priorities for PSR/EMI firms in a ‘Dear CEO’ letter in 2023 stating a top priority for firms to safeguard assets; and the importance of “strengthened visibility and control” over safeguarding arrangements alongside “effective resolution planning” being essential controls in safeguarding of assets.

Areas where many firms have been failing to meet expectations include over-optimism about the time needed to wind-down, lack of consideration of appropriate triggers for wind-down; and a lack of adequate analysis of the costs and cash requirements to achieve an orderly wind-down.

Protecting against failure

A proactive approach to CASS 15 is especially important at a time when the FCA is intervening earlier if it has concerns. The potential sanctions include restricting a firm’s ability to conduct new business, which can turn off revenues and lead to a rapid spiral into insolvency. Supervisory cases involving payments firms are already at a high rate. The higher bar set by CASS 15 would significantly raise the risk of intervention in order to minimise consumer harm.

In taking action to improve documentation to identify funds for the purposes of safeguarding, daily reconciliations, ensuring safeguarded accounts meet requirements and maintaining appropriate records, firms would significantly strengthen visibility and control internally, but also significantly assist FSCS in the case of insolvency to determine eligible customers for compensation payments.

Robust wind-down plans are essential and these need to feed into the proposed CASS 15 resolution packs to ensure an orderly payment of secured funds in a wind-down scenario. Directors should also consider how CASS 15 might impinge on other obligations, including how to balance the return of funds to consumers with the demands of all other creditors under the Insolvency Act.

What you can do now

So how can you get ahead of the curve in dealing with the implications of CASS 15?

First and foremost is to engage with the FCA. By reviewing the proposals and contributing to the consultations, you can help to shape the regulations in a way that is both workable and genuinely enhances transparency and protection.

In parallel, it’s important to look at what both reconciliation and remediation say about the potential safeguarding risks within your business. You can then start to consider and address these risks in an orderly and value-enhancing manner, rather than seeking solutions and implementation at the eleventh-hour.

Finally, it’s important to look at CASS 15 in the wider context of early FCA intervention, the risks this opens up and how the safeguarding demands affect other obligations. By understanding the insolvency risk and being proactive in managing it, your business is not only in a better position to survive, but also thrive.

Here to help

We can advise on how to deal with any inherent risks posed with the failure of safeguarding client assets. This includes support with drawing up wind-down plans and assistance with resolution packs. It also includes looking at the wider implications of the proposed FCA consultation in respect of CASS 15 and in the prospect of earlier FCA intervention and heightened insolvency risks.

If you would like to know more about CASS controls or how we can help, please get in touch.