Navigating the complexities of internal client money reconciliations

Published : 3 weeks ago, on 29/08/2024

Murray Campbell, Product Manager at AutoRek

The strength of any financial organisation hinges on its ability to manage data effectively. In the financial services sector, where data permeates every facet of business operations, efficient data management is crucial for maximising value and minimising operational costs.

Reconciliations are a fundamental control mechanism for finance and accounting. Organisations that fail to modernise their reconciliation process risk overwhelming their finance and operations teams with cumbersome manual tasks and data overload. As UK regulators adopt a more data-centric approach, effective data management has become essential for compliance. For many firms, the internal client money reconciliation (ICMR) is one of the most complex elements of CASS 7 and is often the source of breach and audit issues.

Navigating CASS 7 and the ICMR 

The Financial Conduct Authority’s (FCA) CASS 7 rules apply to investment businesses, involving asset managers, wealth managers, stockbrokers, and investment platforms. These rules govern the handling of client money – funds held by investment firms in connection with regulated investment activities. CASS 7 imposes strict requirements that firms must follow, ensuring that client money is managed safely and compliantly.

However, compliance with CASS 7 is widely recognised as a costly aspect of doing business and one with material regulatory scrutiny; for example, firms must complete a Client Money and Assets Return (CMAR) to the FCA on a monthly basis and undergo an annual external audit. One often overlooked aspect of CASS 7 compliance is reconciliations. Firms must perform ICMR daily, following FCA-defined methods and using only the correct data sources.  Businesses should be able to distinguish between money held for each client and be able to distinguish client money from its own money. But, due to the manual nature of many reconciliations, firms often do not have the time or resources to investigate the root cause of reoccurring discrepancies.

Key challenges in data management 

The calculations required for ICMR involve vast amounts of internal data. Managing financial data is complex due to a variety of data sources and formats, including transactions, market updates, regulatory reports, and client information. Integrating these disparate data streams into a cohesive system is a significant challenge, and without a unified approach, organisations risk dealing with information that is fragmented and inconsistent.

Beyond achieving correct ICMR results, auditors are interested in how firms arrive at these figures. This requires not only precise calculations but also a transparent process. Data transparency is critical, especially when demonstrating the robustness of the reconciliation process during audits. However, maintaining such transparency is challenging when dealing with siloed data across different systems, which can cause discrepancies and undermine both decision-making and operational effectiveness.

Access to detailed, reliable data and the ability to repeat processes accurately are crucial for maintaining consistency. Flexible systems that seamlessly integrate new data sources and standards are necessary to adapt to regulatory changes.

However, more than nine in 10 asset managers acknowledged a significant reliance on manual processes for reconciliation procedures, despite the increasing complexity of regulatory requirements. Historically, tools such as Excel were sufficient for reconciliations, but the evolving regulatory landscape now demands more advanced solutions.

It’s also important to remember that spreadsheets, while familiar, are often inefficient, prone to human error, and lack the robust audit trails necessary for compliance. The reliance on such outdated methods complicates compliance efforts, as the data management requirements of CASS 7 far exceed the capabilities of manual processes.

However, addressing these challenges is not without a cost. Firms need to invest heavily in people, controls, systems, and processes to meet the stringent demands of regulatory rules such as CASS 7. This investment is a required cost of doing business, necessitated by the complex and multifaceted demands placed on financial institutions.

Enhancing transparency through unified systems

A unified approach to data is crucial for managing ICMR effectively. Defining sources is essential to ensure compliance. A unified data system captures full end-to-end transactional data throughout the client life cycle, including client-level records and client money adjustment values. This approach ensures that the data used in the ICMR is accurate, comprehensive and consistent.

Data silos often obstruct this clarity, making it challenging to achieve a transparent view of financial information.  A unified system enhances transparency by providing a holistic perspective on financial information, thereby supporting strategic decisions and improving overall performance by mitigating the inefficiencies associated with siloed data management.

The need for technological investment 

High-quality data is fundamental to effective financial management. Investing in technologies that facilitate data validation helps guarantee the accuracy and integrity of the information, leading to more reliable reconciliations and better compliance with regulatory requirements.

Automating the ICMR process is critical for organisations aiming to enhance accuracy, efficiency and compliance. By automating repetitive tasks like data entry, reconciliation, and reporting, organisations can significantly reduce the risk of human error, leading to more accurate and reliable financial records. Moreover, automation leads to improved operational efficiency, allowing for issues to be identified and resolved quickly, freeing up resources for more strategic tasks. Automated review and approval processes further enhance efficiency, while generating management information (MI) and reports with greater speed and accuracy.

In today’s fast-paced, data-driven environment, embracing technology—such as automation, data integration, and improved data quality—is essential for overcoming the challenges of managing ICMR and adhering to CASS 7 requirements. By investing in advanced technology, organisations can achieve cost savings and enhance their ability to adapt to a rapidly evolving financial landscape.